Putting a Price on Rewards
Your credit card can pay you cash back or even let you hobnob with the stars. Here's why it's often a bad deal
Discover's Get More program, for example, provides 5 percent cash back on certain rotating categories throughout the year and up to 1 percent cash back on everything else. If a consumer spent $10,000 a year, including $500 in the special categories, then he would receive up to $120 at the end of the year. If the same consumer carried a debt of $1,000 at 15 percent interest, the annual interest payment would be $150-more than the cash back. Discover says people should select their card based on their situation; the company's Motiva card, for example, is designed for people who carry debt. After six on-time monthly payments, cardholders receive the seventh month's interest back.
Consumers who carry credit card debt would be better off shopping for a card based solely on the interest rate, says Travis Plunkett, legislative director of the Consumer Federation of America. Websites such as www.creditcards.com and www.100best-credit-card-reports.com compare annual percentage rates, which typically range from 0 to 20 percent.
Credit card companies increasingly aim rewards programs at consumers who carry debt over each month, says Gwenn Bézard, research director for the Aite Group. But even high-income individuals are at risk for overpaying for rewards. Cards that target affluent consumers are ramping up luxurious experiences offered through their rewards programs, such as suborbital space flights (American Express) and a private meeting with Elvis Costello (Visa). "The trick is to come up with something that looks great in your eyes, but the cost is actually not as high as your perception of the reward," Bézard says.
There is one group of people with little to lose from rewards programs: those who pay off their balance each month, avoid annual fees, and don't succumb to the temptation of purchase acceleration. For those consumers, says Menke, "it's basically getting something for free."
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