Cash Back Credit Cards
Friday, January 13, 2006 at 09:00AM By DAMON DARLIN
Correction Appended
If it seems like you are getting a lot of credit card solicitations, you are. Credit card companies sent out about six billion letters in the last year.
But if you opened any, you may have noticed a dwindling number of zero-percent balance-transfer offers and more pitches for cash-back reward cards. Half of them are for reward cards.
It is the hottest segment of the credit card industry. Two-thirds of all cardholders have a reward card in their wallets. That is up from about half of all cardholders in 2002. Since then, the number of households using a cash-back card has grown 38 percent, to 32.6 million.
It's time to look this gift horse in the mouth.
Why would credit card companies pay consumers to use their cards? Discover, the industry leader in cash-back reward cards, said it gave away $500 million in 2005.
This is, after all, an industry better known for tactics like offering low-interest teaser rates that shoot up or changing the terms of a contract at a whim. Therefore, it may come as a bit of a surprise that many of the offers are credible as well as lucrative for the consumer. Indeed, cash-reward cards may be one of the most consumer-friendly products the industry has ever marketed.
It is not because the credit card companies have had a change of heart; it is because the dynamics of the industry are changing. MasterCard and Visa card issuers make their money when customers do not pay off their monthly balances; 70 percent of their revenue comes from finance charges.
Discover, which created the cash-back category in 1986, found that if it handed over a little cash to customers, they used the card more. "Loyalty means usage, and that's where we make the money," said Julie Loeger, vice president for marketing of rewards at Discover, a unit of Morgan Stanley.
American Express, which derives 62 percent of its revenue from fees paid by merchants, took notice. Several years ago it issued the Blue Cash card and then began aiming cash-reward cards at specific demographic groups. The In:NYC card, for example, is meant to appeal to New York hipsters by offering "experiential" rewards like a dinner at Tao or V.I.P. access to concerts at Irving Plaza. Citibank, one of the nation's largest card issuers, followed a similar strategy.
It works. Consumers with cash-reward cards stop using other cards. Industry consultants estimate that cardholders put about 75 percent of their charges on a single reward card, so the benefits to the card issuer are enormous. "We don't want orexpect them to spend more, we just want them spending with our card," said Amer Sajed, senior vice president for Citibank's cash-reward business. But UBS Securities estimates that while the annual spending average for a regular Visa card is about $5,200 a year, it jumps to $26,100 for a reward card.
Surveys in the last year showed that consumers who used reward cards preferred cash. TNS, a global market research firm, found that 38 percent of reward cardholders said their cash-back card was their primary card, while only 14 percent cited their air-miles card. But the credit card companies say air-mile cards are still popular despite many airlines' troubled financial status and the myriad restrictions placed on redemption, like limits on the days when tickets can be used.
"Customers are getting very savvy," Mr. Sajed said. "They have a lot of choice and they want something back in return. What we want is customer loyalty."
Card issuers have learned how to encourage loyalty, and that is turning out to be a boon to consumers. Many customers will keep using a card only if they actually get the reward. If the credit card company creates hurdles to redeeming accumulated points, like having to request the reward, the customer defects. So, credit card companies are actually encouraging their customers to redeem. Many issue the rewards automatically.
That is not to say card issuers make it simple to choose a card. Each has different plans offering cash back at various rates depending on where you use your card. So you have to be aware of your habits. Do you spend a lot on restaurants? Do you shop a lot at a specific store? Do you have a house full of teenagers who drive up your grocery and gasoline bills? Reviewing a few recent statements will give you the answers.
But first, a few caveats.
Pay no fee. If a credit card issuer charges one, find another offer. As for interest rates, if you even bother to look, that is a clear sign you do not need another card. Skip it and start paying down your credit card debt. It makes no sense to borrow money at an interest rate of 12 or 25 percent a year to get 1 percent back.
Taking out another card could affect your credit score. Do not worry about it, though, if you are not going to borrow money in the next three to six months. Do not cancel the nonreward card that you hold unless it has an annual fee. That will hurt your credit score by eliminating a source of credit history, the biggest factor influencing your score. Just stop using the card.
Ignore any offer with a low cash-back limit. Citibank's popular Dividend Platinum Select looks like a great card because it pays 5 percent on supermarket, drugstore and gas station purchases instead of the more typical 1 percent rate offered on other cards. The fine print says, however, that the most you can get back in a year is $300. So, anyone putting more than $2,500 a month on his or her card would actually be signing up for a reward card that returns less than 1 percent.
The GMAC Mortgage MasterCard gives you a point for every dollar you spend. After you accumulate 2,500 points, it credits $25 to your mortgage, but only if it is a GMAC mortgage. In other words, it is a very restricted 1 percent reward card. You can do better.
Focus on that rebate rate. One percent is becoming the industry norm. Discover's Platinum card, for example, pays 1 percent, but sweetens the deal slightly by giving a 5 percent rebate on purchases at Walgreen's, CVS, Rite Aid, LensCrafters and about 10 other merchants. The Chase Cash Plus Rewards Visa card pays 5 percent on supermarket, drugstore and gas station purchases and 1 percent on everything else with no limits, which makes it ideal for paying bills and even taxes.
If you use your card a lot, charging more than $500 a month, the best cards offer tiers of rates that rise as you charge more. For instance, the American Express Blue Cash card rewards 1 percent on supermarket, gas station and drugstore purchases and 0.5 percent on everything else for the first $6,500 spent. After that it pays 5 percent on the everyday purchases and 1.5 percent on the rest. But there is no reward on spending above $50,000.
If you are a heavy user at a particular store, look for a co-branded reward card. Though the Amazon.com Platinum Visa looks like a humdrum 1 percent reward card with its $25 gift certificate award for every 2,500 points, it gives 3 points for every dollar spent at Amazon. If you spend a lot at Amazon that effectively becomes a 3 percent reward card. Starbucks, Toys "R" Us, eBay and Nascar all offer reward cards.
Banks are finding that customers prefer a $15 gift certificate to a name brand store over $10 in cash. The good part for the banks? That gift certificate costs them less than the cash. "Consumers perceive more value," said Jim McCarthy, a senior vice president at Visa USA who oversees reward card programs.
But usually it is wiser to stick to cash-reward programs rather than ones that offer products. The products are often available at a discount elsewhere.
American Express issues what could be one of the best offers around: 3 percent for restaurant purchases, 2 percent for airlines, hotels and car rentals booked through travel agencies and 1 percent for everything else. That is the pitch for its TrueEarnings Costco card. The catch is that you have to be a member of Costco.
Watch for savings plans, the latest marketing wrinkle. One of the most beneficial entries is One from America Express. The card, first offered in October, pays 1 percent on purchases and then automatically sweeps the monthly reward into a savings account paying 3.5 percent.
If you are not finding the card you want in those billions of mail solicitations, you can go to the Web sites run by the card companies, your bank, or card sites like CardWeb.com, Bankrate.com, CreditCards.com and CreditRatings.com.
"In the last three years, the market has become more competitive," said Ms. Loeger of Discover, which TNS estimates still holds half the market for cash-reward cards. The card companies are still trying to win converts among the pool of consumers who do not use reward cards.
But they say they have no intention of setting off a war that raises the cash-back rewards. "I don't see us doing that," Mr. Sajed of Citibank said. Loyalty has its limits.
Correction:
An article in Business Day on Saturday about credit card companies that have begun to promote their reward programs misstated the restrictions on the Chase Cash Plus Rewards Visa card. Card users can accumulate up to 30,000 points a year; the program is not unlimited.