Reward cards promise perks, but beware of traps

How's this for a perk? You and your 11 closest friends can spend an afternoon trying on jewelry from Sotheby's diamond unit.

Or how about cruising the Mediterranean on a yacht? Or leasing a villa in the south of France? Maybe you'd prefer to test your putting skills on the green with a professional golfer.

These are just a few of the rewards you could earn with the Sotheby's MasterCard coming out in June. These rewards definitely have the "wow" factor, as those in the industry say, and show that rewards programs have gone way beyond airline miles and cash rebates, particularly for the affluent consumers frequently targeted by card issuers.

Consumers often look at rewards as free money. But card issuers offer rewards because they make money from them, if not from you in the form of interest and late fees, then from fees that merchants pay the issuers on each transaction you make.

For the unwary, reward programs can have traps. Terms may not be as generous as they first appear. Rewards can change, expire or disappear. Interest rates and fees typically are higher on rewards cards than no-frill cards.

That is not to suggest you should avoid rewards programs. If you don't carry card balances and are only charging purchases you would have made anyway, a rewards program can be worthwhile. You just need to do some homework beforehand to make sure you are giving your loyalty to the right card.

You certainly have plenty of rewards programs from which to choose.

Sixty percent to 70 percent of credit cards offer rewards, more than double the amount five years ago, said Curtis Arnold, founder of CardRatings.com, which tracks cards. At the current growth rate, he predicts, more than 90 percent of cards will feature rewards in three years.

Even debit cards are beginning to offer rewards. These perks are usually half as generous as those on credit cards because debit-card holders aren't paying interest and late fees to finance the rewards program.

"You can't compete in today's market without a reward program," Arnold said.

Here's how to make the most of a rewards program:

-- Shop around.

Look for programs that fit the way you shop and have rewards you will realistically be able to attain.

Sure, earning two Super Bowl tickets with Bank of America's NFL card sounds fun. But will you really build up 200,000 points, that's $200,000 in charges, to get the reward?

-- Read the terms closely.

Card promotions might play up the perks, but restrictions could be buried in the fine print. "Get out your magnifying glass," Arnold said.

The card might pay, say, a 5 percent cash rebate, but not until charges for the year top $5,000. Or cash rebates might stop accruing once you've earned $300 or $500.

Some high-end rewards might run for only 30 days or limit the number of people eligible, said Shea Long, vice president of sales and marketing for Maritz Loyalty Marketing, which designs and runs rewards programs.

Sometimes, card companies reveal few details upfront, Arnold said. Call the issuer if you have questions. If it is not forthcoming, look for another card.

"Show no loyalty," Arnold said.

-- Weigh costs against benefits.

Rewards cards tend to have higher rates and fees to help pay for the program, experts said.

Ask yourself: Do the rewards outweigh the cost?

Rewards are typically worth 1 percent of card balances, said Greg McBride, senior financial analyst with Bankrate.com. If the interest rate is 14 percent and you carry a balance, a 1 percent reward isn't worth much, he says.

"But if you pay the balance in full every month, that 1 percent is pure gravy."

Some cards charge annual fees, but many do not. If you are not a big spender, definitely go with the card with no fee, McBride said.

Some fees are steep, although they may come with added perks. Sotheby's is offering two cards, one with an annual fee of $85 and the other, by invitation only, for $395 a year.

-- Realize that terms can change.

Card issuers are free to revise terms. When perks prove too costly, for instance, a card issuer might chop benefits or stop promoting the card and let it expire, experts said.

"We've heard cases where people's card company changed ownership, and they lost all their miles," said Emily Davidson, communication director for Credit.com, which tracks cards.

Make sure you read mail from your card issuer. It could contain changes to your rewards.

Davidson said she doesn't wait for rewards programs to change on her. As soon as she has enough points, she redeems them for gift cards.

-- Don't overspend to get rewards.

"Stick to your budget, even if you pay the balance in full," Arnold said.

If you get a $400 cash reward but spent $1,000 more than you would have otherwise, you're in the hole, he said.

Also, be aware that your spending could hurt your credit score, the figure creditors use to determine what interest rate to charge you, Davidson said. Putting every purchase on plastic can push you close to your credit limit. That can reduce your credit score even if you pay off the balance each month, she said.

Eileen Ambrose is a columnist for The Baltimore Sun, a Tribune Co. newspaper.

Copyright © 2014, Los Angeles Times
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