The Real Scoop On Rewards Credit Cards

Tammy wrote in with the following story and question:

I recently got an offer in the mail from Sallie Mae, whom I currently have huge loans from, for a platinum plus credit card with worldpoints rewards. They are offering zero interest on balance transfers till october 2008 and cash back rewards and points (1:1) for what seems like everywhere i will use this card. What I am wondering is would it be a good idea to except this offer considering it is from salliemae. my thoughts on sallimae are a bit tainted and i feel like this is just another way for them to screw me over, although i’m not sure how.

I have alot of student loan debt and am living paycheck to paycheck with just barely being able to put something away. I figure I can use this credit card instead of my debit card so that I can gain the points but pay it off as soon as i use it to buy anything so then that way I’m not aquiring more debt but able to gain rewards.

Are credit cards with rewards a ploy or a great way to get something back? Does it matter that its being offered by Sallie Mae, does that discredit it in some way?

Rewards programs on credit cards are generally legitimate and work just as described. For every dollar you spend using the card, you receive some amount of benefit in the card’s rewards program, which you can convert to cash, gift certificates, or whatever the card provides. Thus, if you use the card and pay it off in its entirety every month, they actually are giving you free stuff to simply use the card to make purchases.

Why do they do this? It’s a simple fact that the average American has significant credit card debt, and anyone that has outstanding debt on their credit report is even more likely to have credit card debt. It’s when you don’t pay off the card in its entirety that they make money off of you.

Here’s an example. Let’s say Joe has a cash back credit card that gives him 1% cash back on all purchases – it also has an 18.9% APR after the end of the grace period. Each month, he puts $100 on the card and pays it off in its entirety. In December, Joe is tied down with Christmas expenses, so he buys $1,000 worth of Christmas presents and only makes the minimum payment, carrying forth $980 into February, where he pays the whole thing off.

Joe is way more diligent than the average American with his card, but here’s the interesting part. His entire year worth of credit card rewards adds up to $21. Those two months of leaving a $980 balance costs him $30.90 in interest. That’s a net gain by the credit card company of $9.90.

For credit card reward programs to pay off, one has to be very diligent and pay off the entire balance absolutely every month. If you fail to do that, it doesn’t take much at all for the benefit of the reward to disappear.

Rewards enticements are a very smart move – for the credit card company. Just as you received this offer and are considering it, millions of other people get similar offers and consider them, too. Some of them get the card. Almost all of them misuse the card and thus their reward program benefits are overshadowed by the credit card interest.

Another pointer: shop around for rewards programs. Most of the ones people get in the mail are pretty substandard – a good rewards program should be getting you at least a 2% return, if not better. My primary use card gets me well above 3% in the form of a rebate on my next car purchase – for every dollar I spend on the card, I get on average about $0.03 in an account that I can redeem when I buy a car. Here’s a guide to finding a rewards card that matches your personal habits.

If you think a rewards credit card is tempting, ask yourself honestly if you will be carrying a balance on it at any time. If the answer is yes, don’t get the card – you’ll lose money at the end of the deal. If the answer is no, shop carefully for a card that matches you. In either case, I probably wouldn’t ever get a credit card offer that was directly mailed to me without request – there’s always something better than that offer out there.

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21 thoughts on “The Real Scoop On Rewards Credit Cards

  1. Amber Yount says:

    You know, not trying to get in this arguement again, but I made $10 off my rewards checking card this month….not bad, it may only be half of what I make through a credit card, but its one less step, one less hassle, one less thing on my credit report, and it doesn’t make me overspend. I would advise her to look for a good rewards checking account, many banks offer them now, and their almost as good as credit card rewards, with none of the overspending attached to it…not everybody has the willpower to pay it off every month, even if they do have the money for it. Thats how they get ya :)

  2. Charles says:

    Companies who issue credit cards don’t make money just from people carrying a balance. They make money off of every single transaction the person makes with the card by charging transaction fees to the merchant.

    Merchants are charged an average of 1.5–5% of the final purchase price. So if you have a cash back card that is earning 1% on all your purchases, the credit card issuer is still making money even if you never ever carry a balance or pay any sort of convenience fees.

  3. Getzly says:

    1% of $12,000 is $120, not $12.

  4. dong says:

    I think credit card can be abused, and there are some practices in the industry that effectively try to take advantage of bad habits. But a responsible credit card user is still profitable to the credit card company – they are not just trying to get customers to pay interest. For instance American Express makes most of it’s money on the transaction charges rather than on interest payments. Remember the merchant has to pay the credit card something the privilege of using their system. So if the merchant pays Amex 2%, and Amex pays you 1% there’s really nothing nefarious about it. As always the burden of responsibility is on the end user.

  5. Kate says:

    Getzly makes the most salient point.

    But I’ll make another. When I was younger, (poorer,) and less financially savvy, I carried credit card debt. When I decided to get it under control and get rid of it, I used those zero interest on balance transfer offers several times over. I paid no attention to the rewards, because there were fewer of them in those days. But the few offered months of zero interest on each card I used to my own benefit. I simply stopped charging anything on the cards and paid off as much as I could each month. When the card I had transferred my balance to was about ready to start charging me for my balance, I traded up to another interest-free-on-transfer-balances card. I did that several times until the debt was paid off.

    Yes, it took attention to detail. It took discipline, some time and effort, and sacrifice too. But that’s how I got out of credit card debt, and I’ve never gone back. So I know that it IS possible to use the irresponsible lending practices of credit card companies to one’s own benefit.

    We still use a credit card. In fact, we use it for just about every expense we have. It’s got a nice cash back reward with no annual fee and we pay it off in full every single month. They’ve yet to take a cent out of our pocket in five years of use.

  6. Trent says:

    Good eye, Getzly. I had an extra zero on the monthly number. That’s been fixed, as has the resulting figures.

    As for rewards checking, I use Electric Orange – it earns 4% interest. Then I use a credit card and use the E. Orange to pay off the balance. I hesitate to recommend using a debit card because they don’t have the same protections against fraud that a credit card has.

  7. vh says:

    I’d feel a lot guiltier about merchants having to pay a fee every time I charge my living expenses (and pay off the balance at the end of each billing cycle) if merchants gave me a discount for paying cash. Maybe one in a zillion does that. Hereabouts, to the contrary, the gasoline merchant that generally underprices every other gas station in the county (Costco) does NOT take cash and accepts ONLY American Express. Some stores refuse to take back returned merchandise–even if it’s demonstrably defective–for at least two weeks after you’ve paid with a check, but if you paid with a credit card they’ll accept the return instantly.

    Evidently merchants feel whatever benefit they get from accepting credit cards justifies the 1% to 5% fee.

  8. Kristi says:

    They also want to encourage you to use your card as much as possible because every time you use your card, the business has to pay the credit card company a fee for transferring money from your credit card account to their business’ account. Credit cards kill small businesses. We have a small business and end up paying around $250/month in credit card fees. That’s hard to afford when you’re a small business. Businesses like Wal-Mart probably pay millions a month in credit card fees.

    Even if you pay your credit card off every month, they still make money from you. It’s just that the businesses you use your card at are the ones paying it, not you.

    Oh, and please be considerate and don’t use your credit card at small businesses.

  9. martha in mobile says:

    I use a 1% rewards card, charge everything (except my mortgage and utilities), pay off the balance monthly and use the 1% for guilt-free vacations every few years. Fun and easy!

  10. Steve W says:

    Rewards credit cards — when carefully chosen and diligently managed by all parties — can be an **exceptional** value. I use a Marriott Rewards Visa (I’m a moderate business traveler — 40 nights/year) for all travel/business expenses and **absolutely everything else I can possibly push onto it, including groceries, bills, gas, etc.** and haven’t privately paid for a hotel room in years. Without paying a single penny, my daughter and I stayed three nights in a 4-Star hotel on the Chicago River in the Loop, and my wife and I the same, several times. My 5 kids and wife and I stay free in Residence Inns every year on our vacations, and out-of-town trips with travel sports teams are covered….

    How much total interest and fees have I paid over the years? $00.00. Nothing.

    The keys: You must be absolutely disciplined & organized about 2 things:

    1. YOU MUST ALWAYS PAY OFF THE BALANCE AND NEVER EVER BE LATE.

    2. If you have a spending dependency with another person (spouse, partner, sibling, parent, children), which if you are married, you do by default, then THAT PERSON MUST SHARE YOUR SENSE OF DISCIPLINED SPENDING/PAYING.

    The 2nd Point is not obvious to most, but it is absolutely critical. ** You will fail **, repeat, **You will fail ** if your spending dependents are not on board with you and do not meet your level of discipline. They can take you down with them, and/or make your life financially miserable. Or the exact reverse.

    Good luck; it’s not easy …. My wife and I didn’t attain that level of discipline until we were older.

  11. Tim says:

    I’m not sure what the question really is here. Tammy should not get the credit card for a few reasons, none of which has to do with it being a reward card.

    Tammy’s argument is a bit confusing. The card is a 0% BT which does not mean 0% for charges. In actuality, for charges it will be at least 9.99%APR. She did not mention BT fees associated, but it is 3% without ceiling with minimum $10. She also says she wants to use the card and pay it off as soon as she uses it. This is what you should normally do–that is, pay the bill off every month and not carry a balance. If she is going to do this, then it makes no difference whether it is a 0% BT card or not.

    Tammy is living paycheck to paycheck, barely being able to put something away. Getting a credit card at this point will more than likely compound the problem. Tammy should seriously review her finances and spending. She has a lot of loans already, as she indicated. There is a big danger for Tammy to keep floating the charges on the credit card and go further into debt.

    Bottom line, Tammy doesn’t sound like she is going to take advantage of the 0% BT. Only the BT is 0%, this means that credit charges are not (they are a minimum of 9.99%). If she elects to take the BT and continues to make charges, then when Tammy makes a monthly payment, the payment will be applied to the lower interest rate (i.e. 0%). So she will continue to accrue interest. This is the case in most cases. This means that she will continue to accrue interest until the BT as well as the charges are paid in full.

    If Tammy intends to pay in full every month, she should opt for a credit card that gives more than 1% for purchases on gas, drug store, and food (i.e. things that she will consume on a regular basis). This would be much better than the worldpoints card, which gives her 1 pt per $1 spent. This doesn’t mean $1 = $1 rebate. You will have to charge $25k before you get the maximum 1% cash back on the card. In order to start cashing in the rewards, you have to have 2500 points which means you have to spend $2500 before you cash in the rewards. If you want to get cash rebate for your $2500 that you spent to get the 2500 points, you will only get back $12.50 which equates to half a percent cash back. you don’t have to cash in at 2500 points, you could wait until you spent $25k total so you could get 1% cash back, but then you aren’t going to earn any interest on the money either. moreover, 1% cash back is the most you can get with this credit card.

    Tammy should definitely read the terms and conditions on any credit card application before applying.

    To answer the other questions. it doesn’t matter who the credit card issuer is. If sallie mae goes under or the credit card dept is bought by another bank, your credit will go with the new bank. if you have bad feelings about a company, then why would you continue a relationship with it? Tammy sounds very angry about Sallie Mae, and I won’t try to guess what the issues are, but Tammy ought to take a look at her financial habits and take some blame for them. If this newest credit card question is any indication of past credit, Tammy may not have read what she was getting into before getting into it.

    Before Tammy can think about getting more credit, she really needs to establish her current financial position.

  12. Marcin says:

    Hey guys,

    The average person does not realize that they are burning money when they don’t pay off their credit card monthly. That’s why they give you rewards. I have the ATT Thank you network rewards card. I have taken out over $500 from the rewards already and never paid a cent to them in finance charges I pay off my card monthly.
    I came across I card I applied for Citi Banks Amex card with thank you network points. You’ll get 5 points for every dollar on gas, food, etc and 3 Points for every other for 2 years. That’s the best card yet I have seen. The bad part is its $99 a year with first year free. Still the best deal around. All other cards give you max 3 points on gas, food, etc and 1 point on all other purchase.
    Even Amex Blue cash states it gives up to 5 percent back on gas, food, ETC and 1.5 on all other purchases. Their fine print…is that they don’t tell you its after you spend $6,500. With this Citibanks Amex you’ll already earn $180 in rewards points compared to $97 with Amex Blue Cash.
    Also with the Citi Amex with Thank you network you get $150 in points after you spend $300. There goes your next years fee. And after two years pass find a new card that gives great rewards.

    These are my few cents to the simple dollar.

    Marcin NYC

  13. FIRE Finance says:

    A simple tip. Credit cards with rewards are helpful if we pay off the entire balance every month. Then the rewards or cash back is a gain for us.
    If we have debt its best to put all of it on a card with lowest APR %.
    It is to be noted that most rewards cards do not offer points or rewards on balance transfers or cash advances.
    So if Tammy is intending to use the rewards card for purchases which she is planning to pay off every month then its a gain. But she should never plan to carry any balance on the card. Then its a win for the credit card company.
    Cheers,
    FIRE Finance

  14. Erin says:

    VH, some states have made it illegal to add surcharges to credit card purchases and Visa and Mastercard expressly forbid the practice, which is why many business don’t offer discounts for cash purchases.

  15. Ramy says:

    I wonder if Tammy will ever get herself to a higher income level, considering that, in spite of her student loans (which implies that she went to college), she doesn’t know that:
    (1) “alot” is not a word in the English language
    (2) “except” is generally a preposition and is NOT the word to be used in that sentence
    (3) “aquiring” is not a word in the English language
    (4) “its” is a possessive and is not the word to be used in that sentence
    (5) the sentence containing “its” is a run-on

  16. Steven says:

    Be careful! Many rewards cards have a pretty hefty “membership” fee. I pay my card balance in full every month, but it costs me $75.00 per year for the privledge of $1.00 for one air mile.

  17. Delphina says:

    Ramy -

    Sadly, a lot of companies accept employees who aren’t finished acquiring basic English skills; it’s simply overlooked for talent in other areas. However, I certainly agree about poor spelling and grammar’s aggravating nature in its prevalence in ‘educated’ society. ^_~

  18. Rob in Madrid says:

    Ramy, couldn’t agree more, thankfully google has a great tool, it’s called a spell checker. I’d be lost without it.

    Having said that I would add that since she is living hand to mouth right now I think another credit card would be too much temptation. It would be very easy to let it slip one month, or use if for a frevolious (frivolous thanks google) purchase. My suggestion would be to focus more on changing her thinking from spendthrift to frugal. Once she’s completely out of debt than she can start thinking about a rewards card.

  19. John says:

    Steven – get a better credit card. There are many rewards cards that give far better deals than that with no fees. Of course, you need really good credit to get the very best cards.

    Also to Trent and everyone else who has said
    similar things: it’s not really true that “almost all” people misuse these cards and end up losing more money than they gain from using them. In fact, a large percentage of credit card users never carry a balance at all (I think it’s somewhere in the neighborhood of 40-60% IIRC). The average amount of credit card debt is a very misleading statistic, because in this case the average is not even close to “typical use”. The average is in fact, way higher than the amount of debt that the typical user carries because it the distribution of credit card debt is highly skewed towards a relatively small number of people.

    Moreover, the statistics about “average debt” don’t even usually distinguish between debt that is being paid off each month and debt that is being carried over. For example, every month I charge $700-$1000 on one of my credit cards, and pay it off in full (I use my cards for groceries and gas to get rewards money). But my credit report will simply report that number as my “debt” each month; there is no way for someone datamining that information to determine whether I am charging $700 each month and paying it off in full or whether I’m simply carrying $700 forward. So it looks like I’m $700 “in debt” as far as these statistics go, but I’m paying no interest so it’s not really a bad thing. Same goes for people who take advantage of extended 0% interest offers on a big balance just to get extended float…the statistics count them as being hugely in debt, but they aren’t paying interest.

    Bottom line: you have to look into the statistics more deeply to really understand what’s going on.

  20. Tim says:

    ramy and delphina, i’m sure the grammar lesson would be useful if the post was about grammar. aside from this, delphina’s first sentence does not make sense because of “aren’t”. Perhaps “haven’t” would have been more suitable. moreover, ramy’s sentence juxtaposition makes for an awkward read. in addition, the “in spite of…” sentence does not really bridge well to the causal relationship ramy was trying to make. the “will ever get..” sentence is a bit awkward as well. Perhaps using “into” vice “to” would have been less awkward.

    that’s just me. i have left plenty of lazy errors, with which both can dissect; however, back onto the topic at hand…

    From the limited information Tammy provided, getting this particular credit card does not seem to be a wise decision.

    .

  21. Jason says:

    I use a PayPal Mastercard. It pays 1% cashback on all credit purchases (not debit, check your transaction!). Since it is pulling money from my PayPal account, I don’t run the risk of not paying off the balance. Also, it pays 5.05% on the balance. It’s a nice deal all the way around.

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