Which reward is right for your wallet?
Credit cards that offer perks are enticing consumers left and right. But who's really gets the rewards -- you or the credit card company? Jeff Tyler reports.
Credit cards (Peter Macdiarmid/Getty Images)
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Tess Vigeland: Are you milking your plastic for all it's worth? Despite the credit crunch, credit card companies are still competing for your business by offering all kinds of perks: airline miles, cash back, gift cards... Marketers have come up with promotions for almost every taste and style.
But behind the offers and temptations, beware of higher costs.
Marketplace's Jeff Tyler reports.
Jeff Tyler: I hate to be the one to break it to you, but if you're like most consumers, you shouldn't be using a perks card. A majority of American credit card holders carry a balance.
Joan Goldwasser covers credit cards for Kiplinger's Personal Finance magazine. She warns that perks cards don't pay off for everyone.
Joan Goldwasser: You are going to pay more in interest than you will ever make on whatever kind of rebate you're getting for the card, so those people should look for low-interest cards and forget about perks.
For the rest of us, who pay off our balances each month, there's a variety of incentives. I use a card that rewards me with frequent flier miles. But some mileage plans are now hitting customers with additional surcharges. If you don't like travel, how about sports? The NFL has a card that earns credit toward football memorabilia. Or maybe you're the NASCAR-type? Make enough purchases and you could hang out with the pit crew. There are eco-cards that put a few pennies toward saving the environment.
Emily Davidson is a financial expert with credit.com. She says these offers sound good, but you don't get something for nothing.
Emily Davidson: You are increasing your spending, which is great for them -- they're getting more merchant fees, they're getting more interest charges on that account. So when you hear those offers -- "This is the card that pays you back" -- they're actually paying themselves back quite a bit, too.
Some cards are better than others at sharing the wealth. Both Davidson and Joan Goldwasser picked the same card as their favorite.
Goldwasser: If you like cash, for instance, I like Blue Cash from American Express.
It pays as much as 5 percent cash back.
I recently opened a new Citi Professional Visa. It's connected to something called The Thank You Network. When I use the card, I get points that can be redeemed for anything from electronics to vacation cruises.
But plans that pay off with merchandise don't get a recommendation from Goldwasser.
Goldwasser: You have to use a lot more points, so you have to use a lot more money to get your free iPod or your plasma TV. I don't think it's really worth it.
Figuring out which cards are worth it is almost an art form. Internet websites share pet formulas for turning the tables on credit card companies.
Jonathan Park is the man behind mymoneyblog.com. He's taken the rewards concept to a new level:
Jonathan Park: What I do is I borrow money from credit cards who offer an introductory rate of zero percent interest, so you're basically paying no interest. I invest it into an insured bank account making 5 percent or so interest and I pay back the balance at the end of the term.
This strategy can be hazardous to your financial health. Scott Bilker runs debtsmart.com. He warns not to overlook the cash advance fees which are often 3 percent. Factor that into a six-month loan at 3 percent and Bilker says the charges add up.
Scott Bilker: So if you have to pay 3 percent in a six month period, that's really 6 percent in a one year period -- 6 percent APR. So if you take that money and put it in a money market account at 4 percent, you're going to lose money. So it's important to do the math.
You'd expect that the credit card companies would have done their own math and figured out that they're lending money to opportunists. Bilker, for example, borrowed $62,000 on his cards and turned a profit of $1,800.
Bilker: Even when I paid them off, they were still begging for me to take that money because they know from their research that most people are going to let that money go beyond the credit offered timeframe and let that money go from zero percent to whatever the rate is, maybe 18 percent or higher.
If you have avoided those rates and managed to turn a profit, you may be tempted to dump the card. But Joan Goldwasser advises against cancelling.
Goldwasser: It's a bad idea. You're better off keeping them and putting them in a drawer or cutting them up and just not using them one way or another.
Canceling cards hurts your credit score, but at the same time, Emily Davidson says, the credit card companies may not give you a choice.
Davidson: They can actually even close your account and this is something we never used to see happening. In the last six months or eight months with the credit crunch we've seen a trend -- a pretty significant trend -- where credit card issuers are going back and closing old, inactive accounts.
You're less likely to get cut off if you pay an annual fee, but financial advisers say it's a mistake -- a mistake I've made myself.
Many cards don't require fees and those that do have been known to let cardholders negotiate lower fees -- or none at all.
I'm Jeff Tyler for Marketplace Money.
Comments
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From San Jose, CA, 07/17/2008
Jonathan Park's program was possible a few years ago when credit card companies did not charge balance transfer fees and savings rates were 5%. I doubt he can do this same thing today and come out ahead, as the banks have structured their offers to prevent this.
Reward cards charge merchants higher processing fees than non-reward cards. There's no totally free lunch to you the end user, because the store has to pay more in the form of higher overhead.
The only rewards cards that should have annual fees are those tied to airline frequent flyer programs. The fee only makes sense if your grace period is 30 days (like American Express or Diners Club charge cards) and you fly often on the airline(s). With the 10 extra days a month of float or about 120 days a year you should keep a little more money in your savings account.
From Albany, NY, 07/12/2008
A few years back when I was a single parent with two kids in college, I used the lower interest rate come-ons from various credit cards to pay a lot of tuition, textbook and dorm fees! The govt rate back then was 7 - 8% compared to 0 - 3% from various credit cards. I kept careful records and always "refinanced" just before the interest rates were scheduled to jump up.
I was worried that I was doing something illegal and asked my financial advisor. She looked over my records and pointed out that I was saving hundreds of dollars in interest and, as long as I tracked this carefully, I was doing nothing illegal or improper.
Besides, it feels good to put $8k in dorm fees on a credit card that charges you 0% interest for a year because it makes you feel like you're actually making the system work for you!
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