How Saying ‘Charge It’ Can Save You Bucks

Randy and Sue O’Connell charge everything. They pull out a credit card at the grocery store, at restaurants and at the movie theater. They use plastic when purchasing anything from pots and pans to furniture. They’ve even charged medical bills. Randy wants to charge their mortgage payments too, but their bank won’t hear of it.

Another example of consumers run amok? Hardly.

The O’Connells are among a new breed of savvy spenders who have found a sure-fire way to make their credit cards pay off. They use a co-branded card that lands them frequent-flier miles every time they charge. Importantly, they also pay off the entire card balance every month.

As a result, they earn free trips that really are free.

They aren’t alone. Co-branded cards are the hottest spot in the hotly competitive credit card market today, says Jim Shanahan, a consultant and the author of a book on co-branded cards.

In an effort to gain customers in a saturated market--the average consumer already has between eight and 10 plastic cards--more banks are teaming up with all kinds of companies to offer tangible incentives for using specific cards.

In just the last few months, for example, Fisher-Price, maker of preschool toys, teamed up with M&T; Bank to offer a card that can land you $50 U.S. Savings Bonds, and Delta Air Lines decided to offer an Optima Card with American Express. Target Stores and First Bank are testing a Visa card that will pay off in Target gift certificates.

The new entrants join established cards that earn gasoline (such as Exxon, Gulf and Shell), automobile discounts (Ford and General Motors), retail discounts (Apple Computer), cash rebates (Discover and GE Capital) and travel points (many hotels, travel agencies and airlines).

Card rebates were popularized a decade ago by Discover, which gained market share against Visa and MasterCard by sending annual checks to its customers. Co-branded cards take the principle a step further by engendering brand loyalty to both the credit card issuer and to the company that provides the perks. General Motors, for example, issued a co-branded card with Household Bank Credit in 1992 and now has 12.5 million cardholders and has sold 700,000 vehicles to people who used their credit card points to get discounts.

People who use frequent-flier cards are more likely to fly a single airline and use a single card for all their purchases. That benefits both the airline and the card issuer, which in addition to collecting fees and interest charges, collects a percentage from the merchant when their card is used, says Nancy Judy, spokeswoman for the American Bankers Assn. in Washington.

However, co-branded cards also offer a tremendous opportunity to careful consumers who use their credit cards for convenience rather than loans. People such as the O’Connells, for instance, are able to win valuable perks--they’ve gone to Hawaii on frequent-flier miles and are now booking a free cruise.

An unusually high percentage of co-branded cardholders are like the O’Connells. Whereas only 30% of cardholders nationwide pay off their balance before ringing up interest charges, roughly 50% of those who use co-branded cards pay off their balances every month and never pay a dime in interest.

They also use their cards about twice as frequently as holders of ordinary credit cards, says Robert McKinley, publisher of a Frederick, Md.-based newsletter called CardTrak. The average consumer charges about $2,500 on bank cards each year, but the average holder of a co-branded card charges roughly $4,500, he says.

Many branded-card users charge far, far more. Some people have become mileage maniacs, going to extreme lengths, such as collecting cash from groups of friends at restaurants and charging the bill whenever possible.

Consider Maxine Sweet, vice president of consumer education at TRW Information Systems in Dallas and the holder of an airline-issued co-branded card.

“Even if we make a major purchase that we’ve saved for, we still put it on the card to get the bonus points,” she says. For instance, Sweet had saved the $7,000 it cost to re-carpet her house last summer, but she charged the bill anyway. That allowed her to collect 7,000 frequent-flier miles and get 30 additional days of interest on her savings to boot.

When she first started using her credit card at the grocery store, she was embarrassed, she says. In her mother’s day, that was a sign that you couldn’t afford to pay your monthly bills. But the family trip to Cozumel was worth the embarrassment. And even if other shoppers scoff, she knows that using a co-branded card copiously--but paying the bill promptly--is smart.

“It’s almost a mistake not to use your card this way,” she says.

Indeed, several airline cards had to put limits on the amount of miles a cardholder could earn in one year (often 60,000) because ome speople were able to charge so much--many of them using the cards to pay things like inventory.

Most analysts agree, however, that if you routinely have a large balance on your credit card, you are going to be better off with a lower interest rate than by using a co-branded card.

And even if you pay off balances, you need to consider annual fees. Many issuers of co-branded cards charge $25 or $50 a year. Meanwhile, the perks you earn are usually worth between 2 cents and 3 cents per dollar charged, says McKinley. The real value depends on how much you want or need the product or service rebated. In general, for a co-branded card with a $50 fee to be a better deal than a no-fee card, you’ve got to charge more than $2,500 annually just to make up the fee.

Figuring out the best card for you can be complicated. Will the product you buy with a rebate be the best deal? Will your earned airline mileage expire before you can use it? But making the calculations can be worth it--in effect adding hundreds of dollars a year to your annual income.

Of course, card issuers aren’t overwhelmingly enthused about prompt payers. Profits come from interest charges. “They have all these ‘deadbeats’ who pay too quickly,” McKinley adds.

As a result, some newly issued cards deliver even more incentives to those with balances. MBNA, which is marketing a card with a $100,000 credit line gives one airline mile per dollar spent for those who pay off their balances. But when you have a balance, you earn 1.5 miles. And the Delta “Sky Miles” Optima card offers a 20% mileage bonus for those who maintain a balance.

Although co-branded cards often carry higher-than-average interest rates, McKinley says there are ways of gaming the system.

Specifically, you get two cards. One card offers a low rate on balance transfers as well as purchases; the other is a co-branded card that offers perks you find valuable. You then charge what you need on the co-branded card, and any time you can’t pay the balance right away, you transfer the balance onto the low-rate card before interest charges accrue.

Says McKinley: “This really is one of those rare situations where you can have your cake and eat it too.”

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Charging Choices

Comparisons among five popular credit cards that give something back to users:

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Annual Standard Issuer fee rebate* American Airlines/Citibank $50 1 mile per $1 Discover None 1 cent per $1 General Motors/Household None 5 cents per $1 Bank Pacific Bell/Household None 1% Bank Shell/Chemical Bank $20 2%, up to $70

Issuer Reality check American Airlines/Citibank Charge $25,000, get free domestic flight Discover Charge $10,000, get $85 General Motors/Household Charge $10,000, Bank get $500 off a car Pacific Bell/Household Charge $10,000, Bank get $100 credit on card or phone purchases Shell/Chemical Bank Charge $3,500, get $70

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*Standard rebate is most common, but some cards have lower rebates for the first few thousand dollars charged, reduce rebates after a certain level, or offer special awards or rebates on their branded products.

Source: Bankcard Holders of America