Cards that pay their users

Reward: Some credit cards offer free gas, merchandise, flights or even cash to those who charge carefully.

Your Money

December 26, 2004|By Gregory Karp

Getting something for nothing is the ultimate in smart consumerism. So, it's no wonder that rewards credit cards have taken off in popularity.

If you can be smart about choosing a rewards card and disciplined about using it, you can reap a host of freebies, from cash and merchandise to gasoline and airline miles. A rewards card credits you with points for every dollar you spend on your credit card. Then you redeem your points for cash or free stuff.

"The question isn't why should I have a reward card; it's why not?" said Tom O'Donnell, a senior vice president with JPMorgan Chase & Co., a major issuer of credit cards. "There are rewards cards that fit any lifestyle."

The danger comes if you use the rewards card to spend more money than you would otherwise. And for those who carry credit-card balances, rewards could be dwarfed by the extra interest you'll pay with a high-rate rewards card.

The best candidates for rewards cards are those people who pay off their balances in full each month.

Ask two questions when choosing a card. First, how quickly can you accumulate points? Second, do you really want the stuff you get with points?

Using the Internet is the most efficient way to compare rewards cards. Try CardRatings.com, CardWeb.com, Credit-Reviews.com, Bankrate.com and CreditCards.com.

Things to consider:

Cash is king

Cash-back rewards programs are the most popular kind and may be the best deal for most consumers They tend to be the easiest to use.

Cash-back programs generally have two structures. One is a flat percentage back, often 1 percent. The other cash-back program is a tiered system that starts you off with small rewards, such as 0.25 percent, and escalates the cash-back percentage above 1 percent as you spend more.

Which to choose?

You can do the math for your level of card spending, but generally if you put more than $10,000 a year on the card, a tiered system reaps more cash back. Light users often do better choosing the flat-rate plan, said Curtis Arnold, founder of CardRatings.com.

Newer programs put rewards cash into an investment account or a savings plan, such as Section 529 college savings plans or retirement account. At least one card puts cash toward the principal on your home mortgage.

Beware of airline miles

Airline miles rewards get a lot of publicity, but they often are not the best deals, Arnold said. Airline cards tend to have high annual fees. If it takes three years to get enough points for a free ticket on a card with an $85 annual fee, you've paid $255 for that "free" ticket.

Equally important, airlines set aside a limited number of seats that can be bought with airline miles. You'll have trouble using rewards miles for popular destinations during heavy travel seasons, said Greg McBride of Bank- rate.com.

"It's easy to accumulate airline miles. It's not so easy to redeem them," he said.

Consider merchandise and other rewards. Some cards offer merchandise from catalogs, free gasoline, hotel packages, gift certificates to specific retailers and donations to certain charities. Make sure you're getting a premium for being locked into a specific reward. Otherwise, it's a better deal to choose rewards cash.

"It's hard to beat cash, but if you can earn a higher payout on another card, that's worth consideration," McBride said.

Some cards offer access to rewards that money can't buy, such as exclusive music concerts with big-name stars or hard-to-get tickets to NFL football games. One offered private yoga lessons with actress Gwyneth Paltrow.

Look for point boosters

Some rebate programs supersize the points you earn for certain categories of spending, such as gas and groceries, or for purchases at specific retailers, such as L.L. Bean or Barnes & Noble. With these, you can rack up rewards quicker than the usual rate of one point for one dollar spent.

Payback period?

Estimate how long it will take to redeem your rewards points. Do you really want to wait years to accumulate enough points for an airline ticket? Maybe earning a free cup of coffee at Starbucks would be more satisfying because you reap rewards quicker.

And don't forget to ask whether the card's rebates expire. See if there's a reward limit. Many rewards cards limit cash-back rewards, for example, to $300 a year, while others have no ceiling. Compare other features, including grace period, annual fees, if any, and late fees. Also factor in the interest rate, in case you occasionally carry a balance.

Rewards also are becoming available for debit cards but at levels half as lucrative as credit cards. Often you get one rewards point for every $2 spent, but if there is an annual fee, it's lower than a similar credit card.

Still, using debit rewards may work best for some people. You'll never pay interest on a balance, and you still get something back for everyday purchases.

Gregory Karp is a personal finance writer for The Morning Call, a Tribune Publishing newspaper in Allentown, Pa.

Heavy use pays off

Once you've chosen a rewards card, use it wisely by following these tips:

Pile spending on your card. To get the most out of your rewards card, put as many expenses on the card as possible, assuming you pay it off each month. Instead of using cash, checks and debit cards, put the purchases on the rewards credit card. That means groceries, gasoline and cable TV service - all the usual things you buy in your daily life.

Don't close other credit-card accounts. Even if you switch spending from your existing card to a rewards card, don't shut down the old account, especially if you've had the card a long time. Why? It could hurt your credit score, the number that lenders look at in determining whether to lend you money and at what interest rate.

Don't apply for too many cards. That, too, can hurt your credit score.

- Gregory Karp

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