Harvesting Rewards
Credit card firms are dangling the carrots in an effort to win over loyal users
Charge it. Get something back. It's the new mantra among the nation's largest credit card companies. Gone are the days when a pen or photo frame arrived in the mail as a thank-you for being a loyal customer. Reward programs are becoming more popular and better than ever, as card issuers offer gift certificates at your favorite store, discounts on airfares and cars, and even hard cash to nab your business.
That's good news for consumers like Ira Stoller, a telecommunications sales agent who lives in Butler, N.J. He uses his credit cards just about everywhere: at the grocery store, to shop online, even to buy lunch every day at his local Subway. The more he spends, the more he gets back. Just last month, Stoller charged $10,000 and earned a reward of $100 in return. "Is that a lot?" he asks. "No. But it reduces the money I spend. Who among us would refuse that?" Stoller, 70, who holds three reward cards, estimates he earned about $270 in cash and $130 worth of merchandise last year.
In 2004, roughly 3.8 billion direct-mail pitches contained offers for reward programs such as cash back, points for merchandise, frequent-flier miles, and other freebies, according to Comperemedia, which tracks direct-mail offerings. That figure is up about 35 percent from almost 2.8 billion just a year ago. Why the sudden jump? "Issuers are trying to figure out how to hook a new customer or maintain an existing customer," says Lisa Hronek, a research analyst with Comperemedia. Already, more than 60 percent of all general-purpose accounts include rewards programs.
And the rewards war is just heating up. There are too many credit cards in circulation, and the companies that issue them need a gimmick to compete. The average consumer now holds between four and five credit cards, and the next generation of cardholders is smaller. Recent regulatory changes, which allow American Express and Discover to issue cards with banks previously restricted to Visa or MasterCard, have also opened the floodgates to intense competition. Add the rise of debit cards, and issuers have plenty of reasons to work harder at getting consumers to pull out their credit cards. "Rewards are what creates that greater loyalty," says Tom O'Donnell, senior vice president of Chase Card Services.
All this has meant more creative and unique freebies for consumers. Take American Express, which last year launched the IN:NYC card. New York hipsters who use the card get certificates and access to VIP rooms at local hot spots, restaurants, and lounges. "Anyone who has a plain vanilla card is missing out," says Robert McKinley, CEO of CardWeb.com, an online resource that tracks the credit and debit card industry.
Choices . With such a dizzying array of options, how do you choose the best reward card? It's a matter of deciding what you want--and then reading the fine print.
Before comparing offers, evaluate your monthly and annual spending levels to choose the best deals for you, advises Greg McBride, a senior analyst with Bankrate.com. The answer just might be none at all. If you tend to run up balances on your credit cards, or lack the discipline and money to pay off your debt regularly each month, then a reward card could be an invitation to disaster. Interest rates on rewards cards, while increasingly competitive, are at least 2 to 3 percentage points higher than rates on regular cards--which could mean you'd pay well over 20 percent on your balance. You don't want to join the increasing ranks of Americans who are awash in debt (story, Page 38).
Still, if you're diligent about managing your finances, the rewards can be tempting--especially as some cards have started to offer more points or cash back for those who carry a balance. For the right user, they can prove worthwhile.
Reward cards essentially come in three flavors: merchandise/retail, cash- back, and travel. Start by examining your personal preferences. "Some people are motivated by aspiration rewards [such as a vacation to Paris or use of a concierge service]," says David Robertson, publisher of the Nilson Report, a newsletter that tracks industry trends. "Other people would just as well have 20 bucks off at the Gap." So ask yourself: Would you prefer a cash-back award instead of redeeming points for merchandise? Do you travel frequently? Have a favorite store? There's most likely a card that fits your lifestyle.
MERCHANDISE CARDS. Most cards that offer merchandise rewards tally up roughly one cent in gift certificates or product discounts for every dollar you charge. These can be a boon for consumers who are loyal to a certain company but not for consumers who like to shop around. For example, fans of General Motors automobiles might want to consider the GM MasterCard, which gives cardholders a 5 percent rebate on every purchase, but the reward dollars can be used only toward the purchase of a GM vehicle. The same goes for those who hold cards like the SonyCard or the Mercedes- Benz card. But redeeming some rewards can be a trying process. Some programs make customers call in to request a certificate, then wait a few weeks for it to arrive in the mail.
A better choice might be something like Chase's Disney and Starbucks cards. Both offer rewards at the point of sale.
CASH-BACK CARDS. Slow redemption and limited choices on merchandise cards caused Jay Klauminzer to switch to a cash-back card. "You're limited only to what they have," says Klauminzer, 26, a management consultant in Washington, D.C. "It didn't feel very rewarding. With cash, I can use it for whatever I want."
Some cash-back cards offer more if you swipe your card at "everyday stores," like the gas station or the supermarket. Take Chase's PerfectCard, which gives you a flat 1 percent on all purchases but 3 percent if you use the card at a gas station.
How much you spend is another factor. While some cash-back cards offer a flat rate, which might appeal to those who charge small amounts, many have a tiered structure, with cardholders earning more money for spending higher amounts. The Discover Platinum Card promotes a rate of 5 percent with select merchandisers and up to 1 percent cash back on all other purchases. To get the full 1 percent, however, Platinum cardholders must hit an annual spending amount of $3,000. Before reaching that amount, cardholders get 0.25 percent on the first $1,500 and 0.5 percent on the second $1,500. If you spend just $3,000, your reward will be only $11.25.
Tiered cards typically work best for heavier spenders. American Express's Blue Cash Program offers 0.5 percent up to $6,500 and then 1.5 percent up to $50,000. Use the card at supermarkets, drugstores, and gas stations, and you get 1 percent back up to $6,500 and 5 percent up to $50,000.
With the Citibank Dividend Platinum Select, it's not about how much you spend but where you spend it. The card offers a flat 1 percent on all purchases but 5 percent back at drugstores, supermarkets, and gas stations. Spend $4,000 annually, and get $40 to $200 back. But the total annual reward is capped at $300. Chase's PerfectCard is another option for moderate to heavy spenders: The annual reward amount isn't capped, so those who spend more than $30,000 can get anywhere from $300 to $900.
TRAVEL CARDS. While travel programs may seem like dinosaurs compared with the newer breed of rewards cards, they still offer the most bang for the buck. Travel reward cards are best for individuals who are "frequent travelers" or "frequent buyers," says Tim Winship, publisher of FrequentFlier.com. Frequent fliers should consider signing up for cards affiliated with an airline frequent-flier program. Almost every airline now offers such a card, from the big carriers like American and Delta to discounters like Southwest and JetBlue.
The best advantage of this kind of card is that the miles you earn by charging on your card can be combined with the miles you earn when you fly. "Don't get distracted by all the bells and whistles," says Winship. "The idea is to be very focused on a single program."
In other words, be like Al Liu, 31. The Milwaukee resident, who works for a specialty coffee company, recently signed up for a Northwest card because the airline was making a bigger push in his hometown. Liu, who travels overseas a few times a year on work and vacation, found the partnerships between Northwest and foreign carriers like Malaysia Airlines and Copa Airlines to be appealing; he used his Northwest miles to travel on Malaysia Airlines for one leg of a trip to Malaysia.
There is one snag to using an airline card: an annual fee. Though fees have dropped in the past few years, many cards still charge users anywhere from $25 to $125. Also keep in mind that it typically takes 25,000 miles to redeem a free ticket. "You may end up shooting yourself in the foot," says Curtis Arnold, founder of CardRatings.com. If it takes three years for you to rack up enough points on a card with an annual fee of $80, it would cost you the amount you charged on the card plus an extra $240 in fees. "I could go to a discount airline and get a ticket for less than that price range," says Arnold.
BANK CARDS. A new crop of cards offers a mile for every dollar spent and allows cardholders to redeem the miles on a number of carriers. These bank cards often come with a low or no annual fee, making them a wise choice for someone who spends but doesn't travel much. Some, like Capital One's No Hassle Miles, also lower the number of miles required to earn a free flight (the No Hassle Miles sets the bar at 8,000 points). But you would still have to spend around $8,000 to get that free flight. "You have to fit the mold," says Randy Petersen, editor of InsideFlyer magazine. "If you are a single guy eating . . . TV dinners all the time, then this is not going to work for you."
Bank cards are also aimed at disgruntled frequent-flier members who face increasing restrictions and blackout dates when using their mileage. The biggest disadvantage of these cards is that you cannot combine the miles you earn by swiping your card with any traditional frequent-flier programs, but some cards are starting to compensate for that inconvenience. The Citi PremierPass, which made its debut last year, not only gives cardholders a point for every dollar spent but 1 point for every 3 miles flown on a plane. That's all for no annual fee; pay $75 for a more expensive version of the card and get 1 point for every mile flown and 2 points for every dollar spent at supermarkets, drugstores, and participating merchants.
Whatever card you pick, just remember that issuers can change the terms of a card or cancel the program altogether, leaving you with worthless points or in a different program altogether. Take the Barnes & Noble MasterCard Rewards Program, which was discontinued this April. Cardholders retained the points they earned on the card but were switched to MBNA's WorldPoints program instead. So plan accordingly. "Don't think long term when you are doing these programs," says McKinley. "Think in terms of a year or less." After all, nothing lasts forever.
ARE REWARD CARDS FOR YOU?
Do you carry a month-to-month balance?
YES - Standard Cards. Try looking for a credit card that might have a more attractive interest rate than reward cards.
NO - Do you travel a lot?
YES - Do you belong to a specific frequent-flier program?
YES - Travel rewards. Look for an airline-affiliated card, like United Airlines Mileage Plus Visa from Chase or Delta SkyMiles from American Express.
NO - Look for a card that will let you travel with any number of airlines, like Citibank's PremierPass.
Are you a brand-loyal consumer?
YES - Merchandise rewards. Look for a card tailored to fit your specific interests and buying habits. If you shop at a particular store or dine at a certain restaurant, check to see if there is an affiliate card.
NO - Are you a heavy spender?
YES - Cash-back rewards. If travel or merchandise rewards aren't appealing, cash-back programs are a third option. Look for a tiered rebate card, like American Express's Blue Cash Card.
NO - Look for a flat-rate rebate card, like Citibank's Dividend Platinum Select.
NOW YOU'VE GOT A CARD
Be aware of any limitations with the rewards program, like expiring points or minimum balances.
Watch out for sudden changes in your rewards program rules or the card fees.
Always scan the horizon for a better deal.
Graphic by Danny Dougherty-- USN&WR
This story appears in the August 8, 2005 print edition of U.S. News & World Report.