How to Be a Card Shark
Here's the 5 zillion-point question: do you really want rewards from your credit card? After all, the cleanest reward deal is 'cash back' on purchases

Jane Bryant Quin, March 14 issue (2005)

March 14 issue - Zero percent interest on credit cards is so yesterday. You've heard it all: get a new credit card, run up big bills, don't pay in full (please) and ride interest-free for six or 12 months. Or transfer your balances from other cards, also at zero percent. "Ho hum," you say, "is there anything more?" Enter the zero-interest rewards card—those cards that promise you the moon if you charge enough to earn 5 zillion points.

More than half of today's credit-card solicitations offer rewards, says Jim McCarthy, a senior vice president at Visa. You typically get one point for every dollar you charge, with extra points for particular kinds of purchases, such as gasoline. All kinds of "gifts" are available—cruises, mortgage payments, entries for a monthly jackpot, dinner with a National Football League coach.

These card issuers want only borrowers with golden credit, so don't bother applying for zero rates if you have a recent late payment on your record. But your current bank card might have monthly, unadvertised, low-rate specials. Call, and try for a rate cut on your balances or a cheap cash advance.

Here's the 5 zillion-point question: do you really want rewards? If you always pay in full and the card has no annual fee, you might as well take all the perks. But it's a different story for the 60 percent of consumers who carry balances all or part of the time. The variable interest rate on standard cards today is 13.48 percent, according to Bank The regular rate on rewards cards, after your zero-rate term expires, averages 1 percent higher (how else did you think the card issuers pay for those so-called free gifts?). Some Citibank cards may jump to 15.49 percent on purchases and 20.49 percent on cash advances. A $25 gift certificate doesn't come close to covering extra costs like those. What's more, at least half of all cardholders have never claimed their points, in which case you're paying for something you didn't get.

Smart consumers go for the cheapest card (find them at At Pulaski Bank in Little Rock, Ark., you'd pay 5.5 percent with a zero-interest introductory offer and a $35 annual fee. It's advertised as a "fixed" rate, but that's another story. In the fine print, banks—all banks—give themselves the right to raise your "fixed" rate at any time. (By me, that shouldn't be legal, but I'm apparently cuckoo.) All card rates will rise as general interest rates do. You'll see fewer zero rates, says industry expert Marc Sacher, of Auriemma Consulting.

The cleanest reward is "cash back"—not a gift certificate but real, use-anywhere money. Maritz Loyalty Marketing reports that three times as many cardholders prefer getting cash back to airline miles. Discover pays you 1 percent, which you claim by phone or online. Chase Perfect rebates 3 percent on gasoline and 1 percent on other items automatically to your card.

Cash back also fixes the dollar value of your reward. Points are messier. Run up 2,000 points on a Nordstrom card and you get a $20 gift certificate. At MBNA, by contrast, 2,500 points are worth only $12.50. Citibank's Home Rebate card credits 1 percent of your purchases toward your mortgage principal at any bank. That raises the rebate's value because it saves you interest.

Warning--zero-rate offers are laid with traps. Here's how to play, says Robert Manning, author of "Credit Card Nation":

  • Pay early. If you're late on one payment, even on a different card, you'll lose your zero percent. Worse, you may be bumped overnight to the bank's punitive interest rate, which may run anywhere from 24 percent to 30 percent.
  • Check your actual interest rate. It may be higher than you think. Discover advertises rates "as low as 7.99 percent." But the card that comes in the mail might charge you as much as 16.99 percent, depending on your credit history. You might also be given a lower credit limit than you expected.
  • Resign yourself to being clipped on points. You can't be sure you'll get every point you actually earn. If you keep your airline tickets and boarding passes, you can reclaim missing airline miles. But who knows what your supermarket owes?
  • Charge nothing on your card for the six or 12 months that your zero interest lasts. All monthly payments are applied to your lowest-rate debt first-namely, the balance transfer or cash advance that you took at the zero rate. Nothing is put toward what you owe on new purchases. Instead, they become new revolving balances, at the regular, high rate (maybe 15 percent). That racks up unexpected interest charges.

American Express has had a twist on repayments that nailed me. Its traditional cards can give people the option of paying less than the full amount each month. Sounds fine, except when you try to pay the old balance in full. AmEx applied my full payment only to the minimum owed—leaving a debt on the books that kept running up interest charges. The rest of my payment (which should have covered the whole bill) was treated as a credit against future purchases. The switch was "disclosed" but in language that didn't mean beans. AmEx refunded my interest and says it's in the process of changing its system. But when fine print can stump even someone who's supposed to know, it's certain that, somehow, consumers are losing out.


This story ran on Newsweek on March 14 issue (2005).