Sunday, July 27, 1997

Making the most of the rebate game: Pick reward cards that pay off quickly

By EDMUND SANDERS

The Orange County Register

So you want to play the rebate game. Here are some tips to help you play smarter.

- Lose the balance. The people who win with reward cards are those who pay off their debts each month. Interest rates on reward cards are typically higher than other credit cards, so it's not worth it if you carry a balance on the card. For example, if you charge $500 a month and only repay about $250 a month, you end up paying more than $300 a year in finance charges, assuming 18 percent interest. By contrast, you'd only earn about $60 in rebates, assuming the standard 1 percent reward card. Also, skip reward cards that require you to carry a balance in order to earn the rebate.

- Two-card draw. If you must carry a balance on your cards, use a two-card strategy. Make your purchases with the rebate card, but then shift the balance to another, low-interest rate card as soon as possible.

- Charge! If you're using your credit card for emergencies and an occasional night out, don't bother with reward cards. The name of the game here is volume. To maximize your rewards, it's best to move all your spending to credit cards. You'd be amazed at the variety of places that now accept cards, from fast-food restaurants to parking lots. Look for big-ticket expenses. It's rare to find a car dealer that will accept plastic, but you may be able to charge a portion of the purchase. College tuition, monthly utility and insurance bills, closing costs on mortgages, swap meets and contractors are examples of expenses that people are now charging. Just be careful to budget your money so you can still pay it all off at the end of the month. Again, the secret is avoid paying interest.

Don't spread yourself too thin. Focus your charging on one or two reward cards at a time. Put those department-store and gasoline cards away.

- Personal choice. It's important to select a card that suits your needs. You'd be surprised how many people are furiously charging away for some reward they don't even care about. Don't get a Ford rebate card if you really want a Beemer. Don't try to rack up points toward True Value hardware stores if you never pick up a hammer. It's often best to select a card that gives you credit toward something you know you will be needing anyway such as gasoline, credits toward your phone bill, or cash. But if your heart is set on that new Cadillac Seville, by all means go for the GM MasterCard.

- Watch out for annual fees. Most credit cards today don't levy annual fees, but they are more common with reward cards, particularly airline cards. Nothing will eat up your rebate faster than an annual fee (except for interest). For example, the average credit-card user charges about $3,000 a year on their card. At that rate, it would take eight years to earn a free ticket with most airline cards. Meanwhile, that person is probably paying $50 or more a year in annual fees, or $400 over eight years. For that price, you could buy your own plane ticket to just about anywhere in the country.

- Quit while you're ahead. Sometimes it's best to drop a card after you've earned your first reward. Airline and other cards often offer handsome signing bonuses or waive annual fees during the first year. That helps you reach your goal faster. But the second time around may not be as easy. Consider hopping to another card.

- Bouncing debt. Many cards offer to pay a rebate when you move existing debt from other cards. Sometimes cards will even pay a higher rebate for these balance transfers. For example, True Value offers a 5 percent rebate for money moved from other cards. But keep in mind that interest rates on rewards cards are typically higher than other credit cards. Be sure you can repay the debt quickly or move it to another card.

- Maximum benefits. Many reward cards cap their rebates. Shell Oil's 2 percent rebate sounds great, but it's capped at about $70 a year. The card may still be worthwhile, but you'll want to keep track of your total points so that after you hit the maximum, you can shift your spending to a different reward card. Also, be sure to find out if your reward points expire. GM has a seven-year expiration on points; Ford's is five years.

- Think short term. Everybody always goes for those sexy airline miles or car discounts. But those programs often take years to yield a benefit and the longer it takes to earn your rewards, the higher the risk. With credit-card companies constantly changing the rules and requirements of these programs, it may be wiser to stick with a rebate card that pays you back a little faster. It could take you 10 years to collect the 100,000 points needed for that Mexican cruise you've been eying. By then the credit-card company may decide to raise the requirement to 130,000 points or perhaps Mexico has lost its appeal. Who knows where you'll be a decade from now. Three years is a good guideline. Unless you think you can reach your goal in under three years (excluding perhaps the car rebate programs), look for a reward that offers smaller benefits in a shorter period, such as a book or record reward card.

- Do the math. Before getting a reward card, figure out your expected rewards. It's not that hard. All you need to do is estimate your monthly charging. Let's say it's $500 a month. Now multiply that by the rebate. For example, with Ford Visa's 5 percent rebate on purchases, it would be $25. Shell Oil offers 2 percent, or $10. Now multiply by 12 to get the annual rebate. But don't forget to subtract any annual fees and account for any caps. For example, Shell's rebate is capped at about $70. Also, some cards offer signing bonuses or special rebates for balance transfers and certain purchases.

- Fly away. Unless you've already stockpiled a ton of free miles with a specific airline or simply must fly on your favorite carrier, consider signing up for an airline mileage card that permits you to apply your points toward a ticket on any U.S. carrier. These programs are increasingly available. For example, Wells Fargo and First USA offer the benefits as a special supplement to their existing, nonreward credit cards. In addition to greater flexibility, those programs often have lower annual fees. About $25 is common, or half the amount charged by most airline cards. Keep in mind: You typically need to charge at least $5,000 a year to make these airline cards worthwhile.

- Cashing in. Cash rebates sound great, but they may not be the best deal for you. In fact, unless you charge more than $5,000 a year, they probably aren't. That's because those 2 percent rebate cards like Discover, Private Issue and GE Rewards don't really pay 2 percent. The rebates start at about 0.5 percent and are tiered up to 2 percent after you've spent about $5,000 or more, depending upon the card.

So if you're charging about $250 a month (the nationwide average), you'd earn about $15 cash back from Discover. But you'd get a minimum of $60 in free gas from the Shell MasterCard or at least $30 in sports gear from the Sportmart Visa.

But if you can charge enough to reach that 2 percent level in a short time, cash-back cards will give you the most flexibility. Everybody can use cash. Just be sure to ask if there's a special reward cycle. For example, GE Rewards uses a July to June calendar cycle. So if you sign up for the card in May, you'd only have a couple of months to accumulate points.

- Watch out for newbies. There are new reward cards being offered every day. Sometimes they can be extremely generous because they are trying to attract business. Other times, they're just inexperienced and don't know what they're doing. Either way, you stand to benefit. But the bad news is that these new programs are a little more likely to undergo some kind of restructuring or tinkering once they figure out their mistake. So the benefits may be short-lived.