Mellody's Math: The Real Price of Credit Card Rewards

Sept. 1, 2004 -- Credit cards that earn rewards with every purchase are the hottest craze in the credit card industry today.

According to CardWeb.com, approximately 40 percent of all bank credit cards have a rewards program affiliated with them. Given the sheer volume of the offers — in the hundred millions, coupled with the accompanying fine print — it is often difficult to determine which programs are actually "rewarding." In fact, according to The Nilson Report, a payment systems newsletter, only 30 percent of credit card users have a rewards card with no annual fee. That said, how can you find the golden egg of the credit card industry?

Do Your Research

The key to maximizing a rewards card is to read the fine print before signing up. While many cards offer an interest rate of zero percent for the first six months, it is important to find out what happens after this period has elapsed, as the rates could increase dramatically.

You also should avoid those cards with an annual fee as well as those which require a high balance to actually earn any rewards. Additionally, find out how you redeem your rewards to ensure that the process is hassle-free with no additional costs attached, and be sure to select a rewards card that actually suits your lifestyle and will be of use to you and your family.

Most importantly, regardless of the card you choose, only spend what you can afford to pay off each month. It does not pay to earn a free airline ticket or $50 cash back if the end result means you are in debt.

Cash Is King … Or Is It?

Since Discover Card initiated the first cash-back rewards program in 1986, the practice has grown significantly. Specifically, approximately 1 billion, or 25 percent of all credit card solicitations in 2003 were for cash-back rewards, up from 700 million in 2002, according to CardWeb.com.