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For careful consumers, rewards are in the cards

Using a credit card is becoming decidedly more rewarding for careful consumers.

When AARP recently launched a new "rewards" credit card, it became just the latest of many organizations and companies that have joined the hottest trend in credit: giving consumers a financial incentive to put their purchases on plastic.

AARP has offered a credit card to members for years. But its Platinum Visa now provides a 1 percent payback to cardholders, issued in $25 gift certificates that are redeemable at gas stations, restaurants, retailers and travel and entertainment companies.

A week earlier, coffee shop giant Starbucks Corp. issued a new rewards card called the Duetto Visa. Last month, online brokerage firm ShareBuilder Corp. launched a rewards card. Walt Disney Co. introduced a similar card in March.

Although rewards cards aren't new _ airlines have been marketing them to frequent fliers for more than a decade _ the number of offerings has more than doubled in the past four years to more than 700, said Hugh Bleemer, executive vice president of co-branding at Bank One Card Services in Wilmington, Del. Bleemer's company, a division of Bank One Corp., is working with more than four dozen partners, including Starbucks, in offering such cards.

Although the deals are getting considerably better, credit specialists caution that rewards cards can be hazardous to consumers who don't pay off their balances every month. The interest charges could easily eat up any monetary benefits the cards provide.

"If you have the discipline to pay off your balance right away, and you are buying things that you would buy with cash, the reward card can get you something for nothing," said Gerri Detweiler, author of The Ultimate Credit Handbook. "But you have to take an honest look at how you are going to use the card. If you carry a balance, you'd be better off shopping for a low-rate card without the reward."

Typically, rewards cards pay the consumer one point per dollar charged, but some use tiered point systems that provide gradually increasing awards to those who spend the most. Some provide extra points for specific purchases. Points usually are worth about a penny apiece in goods or cash.

In the past, card issuers would recoup some of their costs by charging the consumer an annual fee of $35 to more than $100. Now, annual fees are rare, typically charged only on airline and hotel cards, said David Robertson, publisher of the Nilson Report, a credit card newsletter. Interest rates charged on rewards-card balances usually are competitive, too.

The net result of eliminating annual fees is that consumers who pay off their balances each month actually earn money by using rewards cards _ provided, of course, that they don't charge anything they weren't planning to buy anyway just to get the points. In the past, the only consumers who made out using rewards cards were the big spenders who could charge enough to make the value of the reward exceed the cost of the annual fee on the card.

AARP, Starbucks, Disney and other card partners increasingly are providing other giveaways, too, such as merchandise discounts and special cardholder promotions. Consider, for example, the Starbucks Duetto Visa. The card comes with no annual fee and an introductory zero percent interest rate for the first six months. In addition to earning a 1 percent reward for their credit purchases, redeemable for coffee and other goods at Starbucks shops, cardholders get a $10 gift certificate the first time they charge something.

Disney announced a "kids stay free" promotion for rewards-card users this month, worth an estimated $443 for a family of four. The Minnesota Twins baseball team gives two reserved tickets to any regular-season home game to cardholders charging at least $2,500 on its rewards card.

"The only thing better than free is when they pay you," Robertson of the Nilson Report said.

There is a catch, of course. Consumers who leave a balance on their credit cards, even at a relatively modest 9.9 percent rate, will find that the interest charges will cost many times more than the value of the merchandise they received for "free."

For example, charging $5,000 to a rewards card generally results in credits worth about $50. But every month that balance goes unpaid costs the consumer $41.25 at a 9.9 percent annual interest rate.

Only about one-fourth of cardholders pay off their balances every month, Robertson said, and about one-third pay off their balances more than half the time. Not surprisingly, the cardholders whom most issuers are most interested in finding and retaining are those with revolving balances.

Indeed, card issuers have been driven to rewards offerings because they have been poaching one another's best customers for years by promoting low introductory interest rates for those who transfer balances.

"Out of necessity to remain competitive, out of a need to protect themselves from the balance-transfer tiger that they let loose in the marketplace, they had to come out with loyalty programs," Robertson said. "That has come down to making rewards commonplace, immediate and obtainable in the short run."

Marketing specialists in the credit card industry say they have studied consumer preferences and found that the old-style rewards cards _ the ones with annual fees and big-ticket rewards _ didn't appeal to most cardholders simply because they didn't spend enough to get rewards. For instance, airlines typically required cardholders to amass 25,000 points, the equivalent of $20,000 to $25,000 in card purchases, to earn a free air ticket.

The new-style rewards cards often pay off at much lower thresholds. Citibank, for example, recently introduced a "diamond" rewards card that allows holders to buy CDs and videos for 1,700 to 2,150 points. Just 500 points can generate a gift certificate, said Maria Mendler of Citibank.

Meanwhile, many buy-to-save rewards programs have been launched in the past few years, among them Upromise, a college savings plan, and Nestegg, which turns a portion of cardholders' spending into contributions to their retirement accounts. Like simple cash-back rewards cards, which also have proliferated in recent years, the savings cards typically generate contributions to savings accounts at regular intervals, without requiring consumers to spend set amounts.

So far, the new approach appears to be paying off for card issuers. A typical consumer spends almost six times more on a rewards card than on a regular card because it becomes his or her first choice for spending, said Bleemer of Bank One Card Services. That allows issuers to make money on usage fees that merchants pay whenever someone uses a credit card.

In addition, heavy use allows issuers to get a better glimpse at the range of products their cardholders are buying, said Dinah Keefe, vice president of consumer relations marketing at Disney. That allows retailers to target their advertising better and provide pitches that are more likely to result in additional sales.

The rewards market is still ripe with potential, said Lori Teranishi, director of corporate communications for Visa USA Inc. Experts estimate that only about 20 to 40 percent of Americans have rewards cards, which means companies like Visa are going to continue developing specialized programs to cater to virtually every group.

"A one-size-fits-all approach doesn't work," Teranishi said. "A single mom is going to want a different type of reward than the frequent business traveler. We want to give a variety of awards at a variety of different earn levels."

For careful cardholders, this is all good news. Although those who overspend or carry balances to earn rewards will pay dearly for their freebies, those who spend judiciously and who pay off credit balances will be paid to simply say "charge it."

"As long as you are spending anyway," Keefe said, "why not earn some rewards while you do it?"

_ Los Angeles Times