Do You Really Need
A Reward Program?
As enticing as
credit card reward programs look, especially frequent flyer
reward programs, they are not for everyone.
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In this chapter
I’m going to show you how to analyze a reward program so you
can decide whether or not paying higher annual fees and
interest rates are worth the freebies that these types of
programs offer.
There are 2
broad categories of credit cards available today.
1) Credit cards
which offer a reward program, such as free frequent flyer
miles, cash-back on purchases or other rewards.
2) Basic “no
frills” credit cards which do not offer rewards or, in some
cases, only very basic rewards such as discounts for purchases
made from certain affiliated merchants.
Since there
really is no free lunch, the more generous the reward program
offered by the card issuer, the higher the annual fee and/or
interest rate tends to be.
Sometimes it is
possible to negotiate both the annual fee and the interest
rate, and it’s always worth calling the card issuer to ask for
a better deal. The longer you’ve been a customer, the better
your chances are of cutting a deal.
If you’re not in
a position to negotiate or if you are thinking about getting a
new rewards-based card, it’s a good idea to do some basic cost
comparisons first to determine whether or not the benefit of
carrying the card outweighs the costs.
Here are some
guidelines to help you make that determination:
The average
frequent flyer card credits you with one reward point for every
dollar charged to the card. Points are converted to miles
according to the card issuer’s formula.
The average
cash-back card may rebate you as much as 5% of your annual
spending, or as low as 1%. Most cards have a maximum amount of
cash you can earn in a year.
Annual fees for
reward cards, frequent flyer or cash-back, typically run
between $25 and $100, depending upon the card issuer and your
credit score.
Again, depending
upon the card issuer and your credit score, the Annual
Percentage Rate (APR) usually runs around Prime Rate plus 6-10
percentage points.
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