Credit Basics
Before signing up for new plastic, read the fine print
by
Purva Patel
Business Writer
July 13 2003
FORT LAUDERDALE, FL --
Airline miles. Gas. Toys. Name it and
there's probably a credit card reward program for it.
Credit card companies have teamed up with hundreds
of retailers to reward consumers for using their plastic. The cards usually award
points for purchases made, and points can then be redeemed for prizes.
The movement toward reward cards has become heated
as credit card issuers battle for new customers. About 40 percent of the bank credit
cards in use, or about 210 million, have some type of rewards program attached,
according to Cardweb.com.
Some of the most aggressive cards offer high cash
rebates and no annual fees, said Curtis Arnold, founder of Cardratings.com. "Offers
have tended to become more and more competitive in the last six months to a year,"
he says. "They're trying to entice people with dangling carrots."
But not all incentive cards pay off in the long run. From hidden fees to high interest rates and restrictions only found in the
fine print, these cards can push consumers to rack up more debt than awards.
Companies started issuing reward cards heavily in
the late 1990s, focusing mostly on cards that allowed users to amass frequent flier
miles. Now the rewards run the gamut targeting those who frequent Utah ski resorts
to those who trade stocks.
Often the cards will credit users for each dollar
spent. For instance, the Barnes & Noble MasterCard credit card program allows
you to collect two points for each dollar spent at one of its stores and one point
on purchases made elsewhere. The points can then be redeemed for gift certificates.
For example, 1,000 points earns a gift certificate worth $10.
Cash-back cards let you collect checks or credit
your account for a portion of what you've spent. They generally offer rebates from
0.25 to 2 percent of total purchases, and some are on a tiered setup, where you
get larger rebates with more purchases.
But if you only charge a small amount a year, a
card that offers a flat rate may be more worthwhile.
No great reward
Reward cards are profitable because credit card
companies collect processing fees charged to merchants. But what some consumers
may not realize is that such cards may advertise low rates up front that rocket
once a customer has signed up. Companies say they have to charge higher rates to
make up for the cost of the giveaways.
Because rates for reward cards tend to be about
a percentage point higher, such cards usually don't make sense for those who fail
to pay off their accounts each month, said Greg McBride a financial analyst at Bankrate.com.
"Somebody that carries a balance is better served
by finding a low rate card rather than pursuing a rebate or reward card," he said.
That's because balance carriers may end up paying for the free item indirectly through
high-interest payments.
Experts also advise being wary of cards that encourage
carrying a balance, lest you pile on the debt for a less valuable reward.
For example, the Toys "R" Us Visa Card issued by
Chase Manhattan Bank lets users earn a 5 percent rebate on purchases at its stores.
It also lets consumers earn a 0.5 percent rebate on any purchases made with the
card. The reward doubles to 1 percent when an account carries a balance of $500
or more.
For those people, who carry a balance anyway, "we
give them a little something extra," spokesperson Susan McLaughlin said.
But that's a small amount to get back if you have
to pay an interest rate of almost 12 percent on that balance. For example, if you
charge $600 at Toys "R" Us and you already have a $600 balance, you'll earn a $36
rebate. But you'll be paying about $12 each month in interest, virtually wiping
out the rebate's value in three months if you don't pay off your credit card bill.
"These people aren't stupid. They're not giving
away money," said Howard Dvorkin, president of Consolidated Credit Counseling Services in Fort Lauderdale. "The fact of the matter is, they're trying to entice you."
