Harvesting Rewards
By Nisha Ramachandran
US News.com
Credit card firms are dangling the carrots in an effort to win over loyal users.
Charge it. Get something back. It's the new mantra among the nation's largest credit card companies. Gone are the days when a pen or photo frame arrived in the mail as a thank-you for being a loyal customer. Reward programs are becoming more popular and better than ever, as card issuers offer gift certificates at your favorite store, discounts on airfares and cars, and even hard cash to nab your business.
That's good news for consumers like Ira Stoller, a telecommunications sales agent who lives in Butler, N.J. He uses his credit cards just about everywhere: at the grocery store, to shop online, even to buy lunch every day at his local Subway. The more he spends, the more he gets back. Just last month, Stoller charged $10,000 and earned a reward of $100 in return. "Is that a lot?" he asks. "No. But it reduces the money I spend. Who among us would refuse that?" Stoller, 70, who holds three reward cards, estimates he earned about $270 in cash and $130 worth of merchandise last year.
In 2004, roughly 3.8 billion direct-mail pitches contained offers for reward programs such as cash back, points for merchandise, frequent-flier miles, and other freebies, according to Comperemedia, which tracks direct-mail offerings. That figure is up about 35 percent from almost 2.8 billion just a year ago. Why the sudden jump? "Issuers are trying to figure out how to hook a new customer or maintain an existing customer," says Lisa Hronek, a research analyst with Comperemedia. Already, more than 60 percent of all general-purpose accounts include rewards programs.
And the rewards war is just heating up. There are too many credit cards in circulation, and the companies that issue them need a gimmick to compete. The average consumer now holds between four and five credit cards, and the next generation of cardholders is smaller. Recent regulatory changes, which allow American Express and Discover to issue cards with banks previously restricted to Visa or MasterCard, have also opened the floodgates to intense competition. Add the rise of debit cards, and issuers have plenty of reasons to work harder at getting consumers to pull out their credit cards. "Rewards are what creates that greater loyalty," says Tom O'Donnell, senior vice president of Chase Card Services.
All this has meant more creative and unique freebies for consumers. Take American Express, which last year launched the IN:NYC card. New York hipsters who use the card get certificates and access to VIP rooms at local hot spots, restaurants, and lounges. "Anyone who has a plain vanilla card is missing out," says Robert McKinley, CEO of CardWeb.com, an online resource that tracks the credit and debit card industry.
Choices . With such a dizzying array of options, how do you choose the best reward card? It's a matter of deciding what you want--and then reading the fine print.
Before comparing offers, evaluate your monthly and annual spending levels to choose the best deals for you, advises Greg McBride, a senior analyst with Bankrate.com. The answer just might be none at all. If you tend to run up balances on your credit cards, or lack the discipline and money to pay off your debt regularly each month, then a reward card could be an invitation to disaster. Interest rates on rewards cards, while increasingly competitive, are at least 2 to 3 percentage points higher than rates on regular cards--which could mean you'd pay well over 20 percent on your balance. You don't want to join the increasing ranks of Americans who are awash in debt.
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