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SmartMoney Magazine by Barry Petchesky (Author Archive)
Get More Perks From Your Plastic
Rubbing elbows with the racing elite. Saving for college. Fighting global warming. Throwing out the first ball at a major league baseball game. When it comes to using your credit-card rewards points these days, card companies offer a bewildering range of new choices. Sure, you can still cash in for all those plain-vanilla perks like mileage, gift cards and dinners at Olive Garden. But faced with increasing competition in the $2.4 trillion consumer-credit industry, card issuers are turbocharging their prizes with greater novelty, greater insider access and — for people whose heads start spinning at the mere thought of all the confusing new options — much greater flexibility. With the average American wallet bulging with five credit cards, there's an understandable urge to simplify to a more versatile card that mixes, matches — and maximizes — your perks.
The rewards game is undergoing a major shift. With rewards cards accounting for an estimated 88% of U.S. credit card spending, financial institutions will shell out $14 billion on their programs this year, up from just $2.7 billion in 2000, according to a report by the Aite Group, a financial-services research firm. Only a decade ago air miles dominated that spending. But this year, for the first time, half will be in the form of cash back, merchandise, services — and experiences. The catalyst? New partnerships. Looking beyond old standbys like the airlines and national retail chains, card companies have begun to cobrand their plastic with logos ranging from swank auction houses (Sotheby's) and professional sports leagues (Major League Baseball) to investment companies (Fidelity) and charities (Make-A-Wish Foundation). The pitch: Whatever your lifestyle or interest, whether you support Rocky Mountain elk or want to donate body armor to local law-enforcement officials, there's plastic to facilitate it. "People aren't satisfied with miles," says Adil Moussa, a payment-industry analyst with Aite. "Cards have to give them more choices."
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But lately, the choices bring a lot of confusion. Are the newer, more flexible cards as generous with their rewards? Are you better off cashing in your points regularly, or saving them for a big-ticket item? And if your card touts 5% cash back, why does the monthly statement award just 1%? Playing all the angles can be complicated. Margo Bramlett, a small-business owner in Columbus, Ga., has as many as eight cards open at once, forever chasing the perfect option. "You learn after a while which ones aren't doing what you want them to do," she says. She carries debt on some of her cards, but only during the interest-free period, after transferring a balance from another card.
Even for those who pay off their balance every month, reward redemption usually comes with a fairly high hassle factor: spending minimums. Monthly caps. Points that expire after just six months. (Not to mention confusing Web sites and spotty customer service.) Mark Shipley, who runs MasterCard's loyalty program, concedes that card companies jigger their programs so that up to half of earned rewards are never redeemed. It's not hard to see why when you read the fine print on cards like the Upfront Rewards Visa Platinum. Want the "free" laptop that comes with signing up? All you have to do, says the company, is transfer a $5,000 balance and carry a $3,500 balance for 18 months. What's more, since the start of the subprime-mortgage crisis last summer, more issuers are invoking something called "universal default." That's a fancy way of saying that if you're late paying your cellphone bill, it can become an excuse to jack up your APR or alter the terms of your reward program.
Whether you're using points to buy an extra tank of gas every few months or one of those brag-worthy new experiences, rewards programs don't have to be unrewarding. For our biannual look at the credit card business, we've examined three of the most popular rewards categories — cash back, experiences and travel — to find out what's new, where the challenges are and how to pump the most perks from your plastic.
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Just Rewards
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If you're among the half of American cardholders who have never redeemed rewards points, it's time you got a return on your investment. Nearly 70% of cards offer rewards — and since consumers are practically yawning at toaster ovens and air miles to Tucson, the perks have gotten, well, a lot perkier. Some card companies are so eager for your business, they'll let you name your own reward.
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Cash BackFew people dislike cold, hard currency. Sixty-four percent of consumers surveyed by Chase, in fact, say they'd prefer cash back to their current rewards.WHAT'S NEW: Traditional cash-back cards calculate your rewards based on a flat percentage (usually 1% to 5%) of your monthly balance — regardless of what you buy or where. The hot trend now is tailoring benefits to your spending habits so that if you drop a lot on restaurants, say, the card will pay off better. Cards are becoming more versatile, too, with companies now paying points on a broader range of spending categories. (Trips to the movies, anyone?) And there's another trend afoot: cards that funnel cash to a savings or investment account or to your pet cause. If global warming keeps you up at night, the GE Earth Rewards MasterCard puts your points toward carbon offsets. HASSLE FACTOR: It's never clear whether your cash will amount to 5% or 1%. The Everyday Rewards Elite Visa promises 4% cash back on gas and 1% on almost everything else; in reality it gives you 0.25% back on that "everything else" until you spend $10,000 and limits gas rewards to a miserly $10 a month. "Without caps, it's just too rich," says John Marucci, VP of National City Bank, the card's issuer. And those charity cards? Because issuers technically make the donation, you forfeit the tax benefit. THE SMART SWIPE: We found a web tool that can help. Enter your monthly spending habits and it promises to identify the best cash-back card. Even better, the Chase Freedom card adapts, automatically paying 3% cash back in your top three spending categories each month. |
TravelFrequent fliers will redeem $6.5 billion worth of air miles this year, still the single most popular type of reward.WHAT'S NEW: Greater flexibility. Until recently, you could redeem your earned mileage only through your credit card company's travel coordinator, which meant you were held hostage to its carriers and flight choices, regardless of convenience or value. Today's cards give you more control over all aspects of your trip. Flexibility makes sense, says Aite Group's Moussa. "I'm going to use my American Airlines card for my ticket, my Ramada card to get my hotel and my Avis card to rent a car? Or I can use one for everything." With the National City FirstAir Elite Visa, for example, you redeem points as a rebate after you've booked all aspects of your trip. HASSLE FACTOR: The newer, more flexible cards carry lousier rates than the old cobranded airline ones. But the biggest reason that nearly a third of all airline miles go unredeemed is red tape. Take United. With more than half a trillion miles unclaimed, the airline told customers in February of last year that any mileage accounts dormant since July 2006 would expire in 18 months instead of 36. How did the carrier explain it? "With this new expiration policy, our most loyal customers will compete with fewer people for free travel. That's great news for you!" THE SMART SWIPE: For a good combination of value and flexibility, the Citi PremierPass/Expedia.com Card lets consumers earn points on any purchase. Moreover, card users can earn triple points on eligible travel buys at Expedia.com, where you can also redeem points not only for flights and hotels, but also for car rentals and cruises. |
ExperiencesMore than half of cardholders stockpile their points with a specific reward in mind. Increasingly, it involves an unusual and memorable experience.WHAT'S NEW: "Insider" experiences — especially those that give you photo ops with boldface names. "You can buy a trip," says Rodriguez of her speedway adventure, "but you can't buy an experience like this." Ask the cardholders who scored a golf lesson with Tiger Woods, a backstage hang with Van Halen or a chance to sit behind the ESPN anchor desk slinging snarky comments at sports clips. Can't find an experience to match your fondest wish? More companies will be happy to customize one — and attach a hefty point value. After all, while you're hoarding points, they're raking in merchant fees every time you swipe. HASSLE FACTOR: Prepare to spend like there's no tomorrow to reach the supersize point totals companies assign to these perks. (To accumulate 75,000 for her racetrack junket, Rodriguez swiped her AmEx for everything, down to sodas at McDonald's.) But with an industry standard of one point earned per dollar spent, all that spending can push consumers who run balances into high-interest-charge territory. Of course, point totals have little relationship to real-life values. Diners Club, in partnership with experience purveyor Great American Days, organizes a wine tasting in your home for eight people for 62,000 points. The cost if you book directly through Great American: $550. THE SMART SWIPE: The American Express Platinum card has no point cap or expiration date — and an impressive catalog of experiences, from floating in zero gravity with Buzz Aldrin to tea with fashion designer Carolina Herrera. |
There are several cards to consider.
Having rewards is really only beneficial if you pay off your bills on-time. There is a 1% cash back card (by Merill Lynch) that has a 9.99% Fixed Rate.
Gas cards tend to have the best cash back for gas. Chase Freedom is a unique card since it adjusts it to your spending habits. If you get a gas card and you have a Chase card, you can get a high cash back on your 4 highest purchases.
Lastly, Fidelity has a 1.5% cash back card that applies to your mutual fund. I think all rewards should be invested so you don't spend it.
Indeed, you need to read the fine print.
'Open' from American Express is offered to small business owners and offers 5% cash back on Gas and Office supplies. No Annual fee.
Fidelity offers an Amex card that rebates 1.5% on all purchases to a Fidelity 529 College saving account. No fee, but high interest, so this is good only if you pay in full each month. For me, this was far better than airline miles that I never seem to be able to use due to blackout dates. Can't beat cash back.
JOE
www.blog.joetaxpayer.com
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One thing to pay attention to is if you're limited to a specific purchase spot (BP gas station isn't likely to benefit you unless you live near one). Earning caps ($1,200/year) is another thing to consider and will mean that you will need a 2nd or 3rd card for that specific category to benefit. Preferably, you want to make sure you have a card that doesn't have an annual fee.