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Credit card rewards programs have traditionally featured airline miles, gift certificates, and cash back for customers who spend enough on their cards to rack up points. But recently, credit card companies have started offering a different kind of gift.
They are handing out lower interest rates, refunding interest payments, and using other strategies to provide incentives for cardholders to pay down their debt and make on-time payments. The deals, however, do not always work in consumers' favor.
Some cards give cardholders points and reduce their annual interest rate for making on-time payments and for staying under their credit limit. Other cards change customers' interest rates depending on how much of their balance they pay off. One card even gives cardholders one month's worth of interest back after six consecutive on-time payments.
Card companies say the idea behind the new rewards is to help customers get on top of their finances. It is all about promoting financial fitness and giving customers the choices they need to help them manage their debt.
These rewards motivate card holders to pay their bills on time, pay down balances, and improve their credit. For instance, some of these rewards are best for customers who carry a balance and are trying to pay it down.
Cardholders can also use online tools from various card companies to calculate how much they need to pay each month to pay off their entire balance by their target date. Because of the continuing recession,
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companies have an incentive to keep their customers from sliding further under water.
This is in response to recognition on the part of issuers that they have to help their
cardholders do a better job of managing their money ... so customers keep those cards for a long time.
The challenge for companies is to balance the profitability of consumers who maintain a balance, and therefore pay interest fees each month, against the increased risk that those cardholders pose because they are more likely to default on their debt. Rewards programs that encourage customers to maintain a balance while paying on time, may help them strike that balance.
According to consumer advocates and credit card experts, consumers who carry a balance may be better off selecting a card with the lowest interest rate rather than participating in one of these rewards programs, although they can help consumers improve their credit.
In general, these cards are great for people who do not have great credit and regularly carry a balance on their cards. Customers who only occasionally carry a balance, on the other hand, would be better off finding a card with a more appealing rewards program.
Those who carry a balance but are not able to pay off big chunks of it each month should probably shop around for the lowest interest rate card possible. It is up to the customer to make the decision as to whether or not the card is a good idea.
Janine Rywak
County Extension Director
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