Credit and its Rewards
Posted on Thursday, March 16, 2006
Ask not what you can do for your credit card — ask what your credit card can do for you.
With today’s credit-card reward programs, you can spend your way to free travel, get store discounts, save money on your next car or even cash credits on your next bill. In a tight market with lots of competition, it’s a way for the issuers of credit cards to stand out from the crowd, reward loyal customers (or at least persuade them to use their cards rather than another company’s ) and, perhaps, distract them from rising credit card interest rates, which are going up as the Federal Reserve raises interest rates to control inflation. Bill Scholl, president of First Security Bancorp, which issues credit cards with reward programs, says there really are no downsides for consumers when it comes to reward programs. “Competition continues to make programs more beneficial to the consumer,” he says. “Most of the affiliation programs are pretty straightforward. The company issuing the cards pretty much absorbs the cost, and that’s a benefit to the consumer. I’m unaware of any that anybody has had any real issues with.” However, Scholl warns, consumers still have to be aware that whatever you get back from your card company in return for your business, it shouldn’t be an invitation to get into massive credit-card debt. “You still have to be aware of your limitations,” he says. “Discipline is the name of the game when it comes to credit cards. No matter how good a deal you get, don’t run ’em up.” CREDIT HISTORY The first nonstore-specific credit card — Diners Club — surfaced in the early 1950 s. Once its advantages became clear — you no longer needed wads of cash to pay for business meals, among other things — banks and private companies also began offering credit cards.
Bank Americard, as it was originally known, is now Visa. MasterCharge became MasterCard. American Express is still American Express. But the credit card is now much more than just an easy way to buy now and pay later.
Card-issuing companies have started to offer increasingly elaborate rewards to loyal cardholders — airline frequent-flier miles, discounts on your gasoline purchases — even cold, hard cash.
In the mid- ’ 80 s, the Discover card, initially affiliated with Sears Roebuck, started offering “cash back” — 1 percent to 2 percent — based on the amount of money you spent on purchases through your card.
American Express’ Blue and Blue Cash cards also offer cash rebates. So do certain Chase and Citibank cards.
First Security offers a card with a 1 percent cash rebate at the end of the year and another that offers travel points. Scholl’s former employer, Pulaski Bank, is a major player in the credit card business, but stresses its low interest rates and doesn’t offer reward programs.
Various credit card companies started issuing cards affiliated with specific airlines, offering frequent-flier miles tied to purchases, good for free or reduced-rate air travel, rental car discounts and free or reducedrate travel insurance.
Citibank, for example, hooked up with American Airlines for its Citi AAdvantage cards; American Express and Delta combined to offer the American Express SkyMiles card.
The more you use the card for everyday expenditures, the quicker you get your rewards. The SkyMiles card, for example, awards double points for purchases made in supermarkets and drugstores.
Now American Express and Capital One, among others, offer miles good on any airline and not subject to airline blackout dates.
“Whether it’s a vacation in New Zealand, or a trip to Southern California,” American Express brags in its recent member bulletin, “the Membership Rewards program can take you where you want to go. With the latest program enhancements, you can fly virtually any airline without blackout dates or restrictions. As an enrolled card member, you can use Membership Rewards points to book a flight, cruise or ‘Lowest Rates Guaranteed’ hotel.” Capital One has been stressing the freedom from blackout dates in a series of cruelly comedic television ads involving a sardonic David Spade.
Some high-end credit card rewards programs reward their best customers with rare opportunities ranging from cosmetic surgery and adventure holidays to a cooking course in a Swiss school.
Diners Club customers, for example, have redeemed rewards points for exotic programs including African safaris and a honeymoon in Bora Bora, according to www. targetwoman. com.
RANGE OF REWARDS Some banks issue a range of reward cards. Chase, for example, has cards that offer cash back — 5 percent back on purchases from grocery stores, gas stations and drugstores, 1 percent on all other purchases; frequent-flier miles; rewards points toward merchandise, travel, gift cards or cash; and gasoline purchase rebates. Many card issuers target specific rewards to specific customers. General Motors credit cards offer car customers discounts that could save thousands on your next GM vehicle. There are similar cards for Volkswagen and Subaru buyers. Citibank’s “Driver’s Edge Platinum Select Card” provides rebates on gas station, supermarket and drugstore purchases you can apply toward car maintenance or to buy or lease a new or used car.
Others offer benefits to retail shoppers. For example, Target’s Visa card, which it issues through its own Target National Bank, promises 10-percent-off shopping days at Target stores when your purchase level rises to a certain rate. Toys R Us has a Visa card frequent-buyer program. LL Bean gives 1 percent cash back on all purchases, but increases the rebate for purchases made from LL Bean.
There are cards for NASCAR fans, Disney devotees, Sony electronics buyers, AT&T telephone users, Shell gasoline burners, Starbucks coffee sippers and watchers of Universal Studios movies and video products.
Most major hotel chains sponsor Visas or MasterCards. Discover recently started issuing cards to customers of Sam’s Club and Wal-Mart. There are credit cards where the rewards go, not to you, but to a cause you support — a percentage of your purchases going to your college or university, for example, or wildlife preservation.
PICKING A PROGRAM Which rewards program, if any, is right for you ?
First, determine what you want most out of your program — cheaper (or free ) airline travel, gasoline, hotel stays, cruises or trips to Walt Disney World.
Or cash. (You can buy airline tickets with cash, but generally you can’t buy groceries with frequent-flier miles. )
Next, decide whether a possible 5 percent off your next car is worth, say, a 21. 99 percent interest rate and / or a $ 185 annual fee.
And consider that in order to reap these rewards, you have to spend money through your credit cards. Is a free airline trip or 10 percent off your shopping day at a retail outlet worth the risk of going into credit-card debt ?
Remember that credit card companies are out to make a profit first; keeping customers happy is a means to an end. They make that profit in part by taking a percentage of the transaction between you and the merchant — usually 1 percent to 3 percent — and from the interest you pay on your outstanding credit card balance. The more purchases you make and the more interest you pay, the more profit they make.
“Obviously there’s money to be made in credit cards,” Scholl says. “That’s why consumers need to be aware of just what the deals are.” Always read the small print. Rewards programs often have limits — once you reach that ceiling, you are no longer eligible for benefits. That information isn’t necessarily available in the offer you receive in the mail — you can only find it buried deep in the tiny-print user’s guide that comes with the card.
Scholl says it’s also important to check the small print for other pitfalls directly related to your credit-card usage — fees and interest rate differences for balance transfers and cash advances and payment-past-due penalties.
“If the [interest ] rate goes from 10 percent to 21 percent because you’re late, you’ve got to know that,” he says.
And if you have trouble reading or interpreting that small print, call the credit card company and ask questions, Scholl says.
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