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PERSONAL FINANCE

New Rewards Are in the Cards, but So Is a Fair Amount of Risk

October 26, 2003|Kathy M. Kristof | Times Staff Writer

For careful consumers, using a credit card is becoming decidedly more rewarding.

When AARP launched a new "rewards" credit card last week, it became just the latest of many companies and organizations that have piled onto the hottest trend in credit -- giving consumers a financial incentive to put their purchases on plastic.

AARP -- formerly the American Assn. of Retired Persons -- has offered a credit card to members for years. But its Platinum Visa now provides a 1% payback to cardholders, issued in $25 gift certificates redeemable at gas stations, restaurants, retailers and travel and entertainment companies.

A week earlier, coffee shop giant Starbucks Corp. issued a new rewards card called the Duetto Visa; last month, online brokerage firm ShareBuilder Corp. launched a rewards card. Walt Disney Co. introduced a similar card in March.

Although rewards cards are not new -- airlines have been marketing them to frequent fliers for more than a decade -- the number of offerings has more than doubled in the last four years to more than 700, said Hugh Bleemer, executive vice president of co-branding at Bank One Card Services in Wilmington, Del.

Bleemer's firm, a division of Bank One Corp., is working with more than four dozen partners including Starbucks in offering such cards.

Risk Versus Benefit

Although the deals are getting considerably better, credit specialists caution that rewards cards can be hazardous to consumers who don't pay off their balances every month. The interest charges could easily eat up any monetary benefits the cards provide.

"If you have the discipline to pay off your balance right away, and you are buying things that you would buy with cash, the reward card can get you something for nothing," said Gerri Detweiler, author of "The Ultimate Credit Handbook." "But you have to take an honest look at how you are going to use the card. If you carry a balance, you'd be better off shopping for a low-rate card without the reward."

Typically, rewards cards pay the consumer one point per dollar charged, but some use tiered point systems that provide gradually increasing awards to those who spend the most. Some provide extra points for specific purchases. Points usually are worth about a penny apiece in goods or cash.

In the past, card issuers would recoup some of their costs by charging the consumer an annual fee of $35 to more than $100. Now, annual fees are rare, typically charged only on airline and hotel cards, said David Robertson, publisher of the Nilson Report, an Oxnard-based credit card newsletter. Interest rates charged on rewards card balances usually are competitive too.

The net result of eliminating annual fees is that consumers who pay off their balances each month actually earn money by using rewards cards -- provided, of course, that they don't charge anything they weren't planning to buy anyway just to get the points. In the past, the only consumers who made out using rewards cards were the big spenders, who could charge enough to make the value of the reward exceed the cost of the annual fee on the card.

Better yet, AARP, Starbucks, Disney and other card partners increasingly are providing other giveaways too, such as merchandise discounts and special cardholder promotions.

Consider, for example, the Starbucks Duetto Visa. The card comes with no annual fee and an introductory 0% interest rate for the first six months. In addition to earning a 1% reward for their credit purchases, redeemable for coffee and other goods at Starbucks shops, cardholders get a $10 gift certificate the first time they charge something.

Disney announced a "kids stay free" promotion for rewards card users this month, worth an estimated $443 for a family of four.

The Minnesota Twins major league baseball team gives two reserved tickets to any regular-season home game to cardholders charging at least $2,500 on its rewards card.

"The only thing better than free is when they pay you," Robertson of the Nilson Report said.

Here's the Catch

There is a catch, of course. Consumers who leave a balance on their credit cards, even at a relatively modest 9.9% rate, will find that the interest charges will cost many times more than the value of the merchandise they received for "free," Robertson noted.

For example, charging $5,000 to a rewards card generally results in credits worth about $50. But every month that balance goes unpaid costs the consumer $41.25 at a 9.9% annual interest rate.

"You could be aspirational about obtaining a clock radio [with rewards] and forget that you could buy three clock radios with what you are paying in finance charges," Robertson said.

Only about one-fourth of cardholders pay off their balances every month, he said, and about one-third pay off their balances more than half the time. Not surprisingly, the cardholders whom most issuers are most interested in finding and retaining are those with revolving balances.

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