America’s Love Affair with Card Rebates

America’s Love Affair with Card Rebates Ahhh, love! Romantic escapes, red roses, chocolate, and…credit cards. What? Granted, we don’t typically associate those little pieces of plastic with romance, but our love affair with reward and rebate cards seems to grow stronger every year. About 85% of U.S. households had at least one reward card in 2007, and 80% of cardholders received some type of reward from their cards. Let’s take a look at reward card basics. Then I share specific tips on how to get the most bang for your buck with each kind of reward. Believe it or not, you can receive hundreds of dollars in cash, gift cards, or airline tickets every year just for using a reward card for your everyday purchases. My wife and I typically get $700 to $1,000 back annually simply by being smart about how we use our cards.

If you’re not currently getting your slice of this tasty pie, I have a treat in store for you. A reward card is one of the
best freebies available to consumers. When you discover the joys of taking advantage of one, I assure you that you will never use a card that gives you nothing back again. Why do business with a company that doesn’t make it as
lucrative for you as its competitors do?

If you’re already getting a piece of the pie, then let’s aim to get you an ever-bigger slice going forward. Cash-back
reward cards, airline reward cards, gas rebate cards, and any other reward cards they dream up can all boost your
bottom line with remarkably little effort on your part.

Important!
This chapter is for people who pay off their balance in full each and every month. If you carry a
balance even on occasion then move on to the next chapter. Reward cards usually carry a higher interest rate than non-reward cards, and the interest you’ll be charged will more than wipe out any rewards you might earn. (Of course, there are a few exceptions to this rule, which we’ll discuss in Chapter 11, “Master Advanced Card Techniques to Save and Make Money.”) If seeing how much more you can get from your cards will motivate you to get out from under the burden of your debt, by all means keep reading! Just don’t start charging on a reward card until you’ve paid off what you owe.

When Did the Reward Card Craze Begin?
Discover, which deserves much credit for transforming the card industry, introduced the first cash-back, no-fee card in a catchy commercial during the 1986 Super Bowl. The card offered a cash rebate of up to 1% on every purchase made using it. At a time when many cards had annual fees and when cash rewards were unheard of, Discover’s new card certainly stood out in a big way. No one had ever offered a no-fee card that gave cash back to boot. Airline reward cards, which typically offer frequentflyer miles for every purchase you make on the card, began to grow in popularity as well back then. When the popular Citi/AAdvantage card debuted in 1987, this co-branded card (meaning it was affiliated with both American Airlines and Citibank) was among the first to offer miles that could be redeemed for free airline tickets.

What Accounts for the Growing Popularity
of Reward Cards? One of the primary reasons for their increasing appeal is the stiff competition among card issuers, who have to work hard to make their cards stand out in the deluge of offers we receive every year. Tempting us with rewards is one of their best bets for getting us to apply for and use their cards. That’s why their direct-mail campaigns consistently
include more sales pitches for reward cards than nonreward cards. For example, according to Mintel Comperemedia, a Chicago-based market research firm, 55% of all credit card direct-mail promos had a reward
component in 2007. These programs have become so popular in the last few years that it’s hard for card issuers to compete in today’s market without a rebate program. Even better from our perspective as cardholders, their competition means increasingly generous rewards for us. I’ve been amazed over the years at how issuers are constantly trying to oneup each other with ever more enticing cards.

A good illustration of how competition has made reward cards more appealing involves rebate percentages. Until a few years ago, reward cards typically offered a 1% cash rebate or 1 reward point for each dollar spent. Now it’s not uncommon to see reward cards offering rebates up to 3% and even up to 5% on certain purchases.

Imagine getting 3% to 5% back just for using a particular piece of plastic. That’s more than we often earn on our savings at the bank! Moreover, we have to pay taxes on the money we earn in our savings account. Not so with card rebates, which are generally tax-free. (Consult your taxadvisor for more info.)

This competition is working to our benefit in another way: Issuers are tempting us with more flexible redemption options. Historically, reward cards allowed cardholders to earn only cash rebates, airline tickets, a narrow selection of merchandise, or gift cards. Lenders are now trying to woo us by presenting many more choices in how we can capitalize on our rewards.

Chase’s Freedom Card, introduced in 2007, is a good example. Marketed aggressively through flashy TV ads featuring the hit song “I’m Free” by The Rolling Stones, it gives cardholders a lot of control over their reward choices. They can choose cash rebates, gift certificates, hotel stays, car rentals, travel on most airlines with no blackout dates, and/or a wide array of merchandise.

In their quest to get us to use their cards, lenders will no doubt introduce other reward cards and modify their existing programs to increase flexibility and customer control. And their popularity will likely grow even more as programs become increasingly specialized and targeted to tempt very specific markets. As Comperemedia puts it:Credit card reward programs have become more sophisticated and tailored for particular consumersbased on their lifestyles, needs, and desires. Thus, affluent cardholders may be offered elite lifestyle experiences such as a Tiffany’s engagement ring or even a trip into space….

Finally, the growth of the Internet has also helped spur Americans’ seemingly insatiable appetite for card rewards.
Case in point: On a whim back in 1996, Peter Flur, a research engineer from Charlotte, North Carolina, started an online community called the Grapevine, devoted to card rewards. The Grapevine was simply an expression of Flur’s personal interest in the subject, but it has since morphed into a popular online community where people discuss
reward cards every day. Similarly, the active Card Ratings.com forum has thousands of user tips on making the most of reward cards.

Although our love of reward cards is a great thing, as with any love affair, there are some potential pitfalls. Follow these tips to avoid them and maximize your benefits from reward cards.

The Dark Side of Reward Cards
Perhaps the greatest trap you can fall into is overspending. Studies show that most consumers spend more on a reward
card than a nonreward card. So even if you pay off your balance in full each month, if you routinely spend more on
a reward card than you can afford, you’ll quickly find yourself in financial quicksand.

Another reason why you might feel a strong temptation to overspend is that reward cards can become quite addictive.
The more you spend, the greater the rebate. Watch out for that, especially if your card company tries to egg you on to spend more with what economists call “purchase acceleration.”

When you near a reward threshold, the lender sends you a letter or an email trying to get you to spend more.
“It’s a way for issuers to remind their customers that they’re getting close to cashing in,” explains Lars Holmquist, president of TSYS Loyalty, which helps financial institutions develop loyalty programs.

Issuers also know that consumers tend to spend more after getting a reward. If you get a free airline ticket as a
reward, for example, you’re likely to spend more on the trip itself (hotel room, meals, souvenirs, and so on).

To avoid temptation, strictly adhere to your monthly budget. If you don’t have a budget, create one.
Homemoneyhelp.com, operated by my endearing friend Terry Rigg (aka Grandpa Terry), is a great resource for free
budgeting tools and advice. Similarly, The Budget Kit (Kaplan Publishing, 2008) by Judy Lawrence, is chock full
of worksheets that make it easy to plan.

Spending and Point Levels
When shopping for and using a reward card, be mindful of your average annual spending levels (that is, the average
amount you charge on a card during a year). Some reward cards offer reduced rebates if cardholders don’t reach
annual spending thresholds.

When estimating your annual spending level, pull out last year’s card statements and total what you spent, or at least look at your average monthly spending for the past three months and multiply by four. If you’ve never used a credit card, you can get a good picture of your spending level by determining what items in your monthly budget can be charged on a card. If checks have been your main form of payment, take a look at your check register.

Similarly, most cards require that you accumulate a certain number of points before you can redeem them. And a few cards offer more generous rebates if you let your reward points grow and don’t cash in your points at the lowest point redemption level.

A good real-life example of this is the Chase Freedom Card, which I mentioned earlier. It allows you to earn a
“$50 check once you’ve earned $50 in rewards.” However, as an added incentive, if you save up $200 in rewards, you
can redeem them for $250 cash back. That’s right. You can earn a 25% cash-back bonus just by choosing a higher point redemption level and of course, continuing to charge on that card!

Knowing how many points are required for the rewards you’re most interested in and how much you have to
spend to reach a desired point level is crucial if you want to get the max from your reward card.

TIP
Keep your eyes out for offers that come in the mail. My wife and I are currently taking advantage of an
exclusive postal offer we received on one of our existing Chase cards. It’s designed for people like us who routinely charge quite a bit in our case, we have five kids and tend to charge more than the average family. Once we charge $24,000 on the card during 2008, $500 will be credited to our account. We automatically get another $500 if our annual spending reaches $48,000. The total will be $1,000 cash-back (which translates into an amazing overall rebate of 2.08%) easy money don’t you think?

Watch closely for offers like this that come in the mail because this was a mail solicitation only. It’s also proof of how badly issuers want to keep our business. In this case, we hadn’t used the card in a long time. Needless to say, I was delighted to do business with Chase again!

Posted in: Chapter 2