Plastic Perks: Making the Most
of Credit Card Rewards

In 1896, businessmen Thomas Sperry and Shelly Hutchinson hit on an idea for building customer loyalty: customers could earn trading stamps, based on the amount of their purchases—then redeem those stamps for additional merchandise. The idea was such a success that, during its heyday, Sperry and Hutchinson's S&H Green Stamps Company was printing more stamps than the U.S. Postal Service.

Stamp-based loyalty programs may have gone the way of the way of the leisure suit and the 8-track tape, but the idea of trying to build customer loyalty by offering rewards is more popular than ever.

Today, nearly two-thirds of all credit cards issued in the U.S. are tied to some type of rewards program, as banks and credit-card companies seek to gain (and keep) market share by making their card just a little bit more alluring than what their competitors offer.

Depending on the type of "rewards card" you choose, you can earn air-travel miles, build up savings for college, receive discounts at hotels and restaurants, or get cash back. Other cards offer "points" toward buying lattes at Starbucks, books (or other stuff) from Amazon, or digital music from iTunes.

All this competition creates a good environment for a certain breed of consumer—namely, those who: 1) know how to choose a card that offers the best value, and 2) can exercise discipline both in making purchases and redeeming rewards.

Several years ago, I noticed that a co-worker paid for all his everyday expenses—from gas to groceries to auto repair—with a Discover card. The reason, he said, was that Discover paid him 1% back on everything he bought. He explained that using the card didn't cost anything, since 1) he paid his balance in full every month, and 2) all his credit card purchases were planned (i.e., he never used the card for impulse buying, only budgeted items).

He made such a persuasive case that I followed his example—being sure, of course, to stick to the rules: pay the card off each month, and don't use it for impulse purchases.

To make the cash-back aspect of the card even more lucrative, my wife and I decided we'd earmark our cash-back checks for one thing only: prepaying our home mortgage. Each time we got a check from Discover, I would send a check for the same amount to the mortgage company. Those small prepayments helped us grow our equity a bit faster than we otherwise would have, while reducing the overall interest cost of the mortgage.

But be warned. Even a good rewards card will likely cost you money vs. paying with cash. Many studies have found that people spend 15%-30% more when paying with a credit card than when using cash. Plus, card issuers are increasingly using reward programs to entice cardholders to redeem reward points a certain way—and to make additional charges.

"We can go into the database and find a pool of people as small as 25,000 who are wine enthusiasts, buy cooking gear, live within four miles of a merchant, and then create a unique event for that merchant," a Visa executive told the Wall Street Journal.

The next thing you know, you're using your reward points to buy things you never intended to purchase, and (the card company hopes) you're using your card to make additional purchases from merchants the card company recommended.

Robert D. Manning, author of Credit Card Nation (Basic Books), thinks many reward programs are "smoke-and-mirrors" for consumers. "There are so many games to earn points and get rewards, consumers don't understand the value," he told the Washington Post. "Simplicity is the best deal, and getting cash back is the very best," he said.

Of course, you may have a specific reason to want an air-miles card or a college-savings card. Just be sure you understand if the card you choose offers genuine value.

For help comparing what various cards (including cash-back cards) have to offer, go to CardRatings.com. This site, run by a group called Citizens for Fair Credit Card Terms, can help you weigh various offers.

Also, SMI web members have shared a tremendous amount of information about the best rewards cards. Just go to the SMI Message Boards  and use the search function on the word "reward" to tap into their insights.

Before making a choice, read the fine print carefully. Some cards that seem similar may have terms that aren't similar at all.

For example, a few cash-back cards require you to carry a balance in order to earn cash back. (That's not a good deal!) Some cards charge an annual fee (also not a good deal). Some increase the cash-back rate as you increase your spending (can you say, "temptation"?).

Level 1 readers should recognize the best way to get debt-free is to quit using credit cards, of any type, and make your purchases with cash. But if you're going to use some sort of credit card and decide to get a rewards card, remember the two critically important rules: 1) Use your card only for planned (i.e. budgeted) items, not for impulse purchases; 2) Never carry a balance from month-to-month; pay the card in full every time you receive a statement.

By following these guidelines, you can make using a credit card a rewarding experience.

Joseph Slife is a contributing author and editor for SMI. He spent 15 years with Crown Financial Ministries, co-writing articles with Larry Burkett and serving as executive producer for broadcasting. In addition to his work with SMI, Joseph is an adjunct instructor in the Dept. of Communication at Emmanuel College in Georgia.

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