Rebate Cards Produce Winners and Losers

from Greg McBride

Have you ever known anyone whose patented response to any request is, "What's in it for me?" If so, odds are that they carry a rebate credit card.

What is a rebate credit card? A rebate credit card provides the cardholder with some form of benefit that increases as more charges are applied to the card. Perhaps the best-known rebate cards are those that offer frequent flier miles or cash based upon the amount of purchases made with the card.

Though rebate cards are widely available and increasingly popular with the credit card-carrying public, there can be winners and there can be losers. The winners are those to whom the benefits accrue with no strings attached -- the true convenience users of credit.

Convenience users are those that use their credit card for everyday purchases and pay the balance in full each month, so as not to incur finance charges. Frequently, they use a credit card that does not have an annual fee. Such consumers stand to reap the rewards issued by their credit card issuers, as they incur no finance costs and pay no fee for the privilege of toting the issuer's card around in their pocketbooks. Any benefit earned is just that - a benefit.

If there is a cardinal rule to rebate credit cards it is this: Never pay interest! Those cardholders that violate the cardinal rule end up as the losers in the realm of rebate credit cards.

Why? First, the interest charges more than outweigh the benefits earned on the card. The benefits accruing on the card are modest and can be easily dwarfed by the interest charges. A $5,000 balance at a rate of 10 percent paid off in equal installments over the next 12 months would result in total interest of $274.95, but the 5,000 frequent flier miles earned won't get you off the ground. Also, the interest rates on rebate cards have historically been about 1 percentage point higher than on non-rebate credit cards, and often carry annual fees.

There are several factors to evaluate when considering a rebate credit card.

The first consideration for rebate credit cards is the spending habits of the cardholder. Is the credit card used for a multitude of everyday expenses, or just for occasional indulgences? Is the cardholder a businessperson or owner of a business that would be using the card for substantial charges? The level of spending determines the level of benefits earned.

Also evaluate any annual fee on the card. A low-volume consumer is best to avoid a card with an annual fee as these fees may diminish, or offset entirely, the meager benefits earned. However, the larger volume consumers may find that the annual fee is overwhelmed by the benefits earned on the card.

Rebate cards offer more than just frequent flier miles and cash. Other options include free gasoline, gift certificates for merchandise at particular retailers or for general online use, and even discounts on your next automobile.

Which reward gives you the most bang for the buck? For low volume users that don't travel extensively, the air miles may not be tremendously enticing, but the idea of cash back or a free fill-up at the pump could provide some lift to a sagging budget.

Those that do travel extensively may find the additional frequent flier miles earned on a rebate card are the difference between being cramped in coach or flying in the splendor of first class, where passengers reportedly get their very own bags of peanuts.

Finally, many cardholders have gotten creative with their cards in order to rack up the rewards. Cardholders have used their cards to invest in savings bonds or to buy money orders that are then used for paying the mortgage or the paperboy, or anyone else that does not normally accept credit cards.

The key to getting creative is to do so without overspending. Think about how you can transform regular monthly expenditures into something that provides a repeated reward.

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This article was written by Greg McBride, BankRate.com Staff Writer.