Navigating Cash-Back Deals on Credit Cards

Extra green on hand is a good thing in the down economy, but read the fine print from the card issuers.
By Sonja Ryst ,

If you were ever thinking that you might enjoy getting paid in cash to use your credit card, now might be a good time.

As many consumers begin to grub for extra pennies in the face of a teetering U.S. economy, companies have kept up the ante on cash-back rewards cards in recent months. They mailed out 1.118 billion such offers in 2007, up from 1.086 billion during the previous year, according to the market research firm Mintel Comperemedia. This took place even as direct mailings in general declined.

"They're trying to stand out compared to the competition," says Christopher Zagorski, a senior analyst at Mintel. He adds that companies also want to encourage you to use your card for everyday purchases, as opposed to only on a big weekend spree or a plane ticket.

Curtis Arnold, founder of CardRatings.com and author of a book scheduled to be published in July,

How You Can Profit From Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line

, has put as many of his expenses as possible on his cash-back rewards card for years.

Arnold has five children to feed, so even his grocery bill gets high, and his family typically spends several thousand dollars each month.

Last year, Arnold earned more than $1,000 in rebates on his Blue Cash from

American Express

(AXP) - Get Report

card. Then, in November, he got an offer from Chase Card Services, a unit of

JPMorgan Chase

(JPM) - Get Report

, promising him $1,000 back if he spent only $48,000 this year on his card.

When Arnold did the math, the rebate on that card came out to more than 2% back on every purchase he makes this year, so he switched. (The catch: It's a special reward program that Chase doesn't offer everyone.)

Cash-back rewards cards aren't good for people who overspend. Most are targeted to customers who have credit scores above 720. Because the cards tend to have higher interest rates, the rewards are worthwhile only if you don't carry a balance from month to month.

"The consumer can win the rewards card game, but they have to know how to play it," warns Gail Hillebrand, a senior attorney with Consumers Union. "Anyone who doesn't pay their balance in full every single month will lose."

Instead of taking an offer in the mail, you can compare card offers on sites such as

Credit.com,

CreditCards.com,

CardTrak.com,

LowCards.com and

CardRatings.com.

Once you find an offer that looks better than the one on the card you already have, try calling your current credit card company and getting them to top it. The rebates typically range from 1% to 5% cash back on each purchase you make.

Always read the fine print first, especially when the marketing material looks rosy. The ad for the

Citi

(C) - Get Report

CashReturns Card, for example, promises a 1% rebate on every purchase and a "20% bonus on the cash back earned on all purchases for the first twelve months."

While that 20% is written in larger font than any other word or number in the ad, if you study the footnote associated with it, you'll learn that what Citi really meant to say by "bonus" was that you'll get 1.2 cents cash back per dollar spent on eligible purchases.

Another little item in the fine print: They won't pay you any cash back until you accumulate $50. And the terms of your agreement can change at any time with 30 days prior notice, which means you're going to have to keep reading through that legalese every time you get a new statement in the mail.

"The Citi CashReturns Card offers a simple way for customers to earn and redeem unlimited cash back automatically," says Samuel Wang, a vice president in public affairs at Citigroup Global Consumer Group.

"As with any credit card offer, we encourage prospective customers to fully comprehend our product marketing, terms and conditions, and even contact us directly with questions, prior to applying for our products."

The cash-rewards agreements can get complicated even before you agree to them. The Chase Freedom card, for example, gives you 3% cash back when you satisfy "if" clauses, such as spending in certain categories that can range from grocery to pet supply stores, and then it reverts to a 1% rebate after you reach $600 of spending in any given month.

"We're trying to be simple and not fool the consumer," says Sherri Silver, a senior vice president at Chase. She says people get 3% back when that's what they're promised.

"We want the consumers to know what they're getting and to get what they thought they would get. When that happens, then we have engaged and loyal customers."

Another issue to consider is whether your card will work at the stores where you're planning to spend. CardRatings.com's Curtis Arnold says he found that smaller merchants didn't always accept his American Express card, so he had to use a back-up one from

Visa

(V) - Get Report

instead.

"We're all the time building coverage across new industries and smaller merchants," says Beverly Anderson, a vice president at American Express.

The rules can vary on how you get that cash you "earned" by spending. Some companies will automatically credit your award on your next statement, while others might send out a check. Others require you to call and make your claim before a given expiration date. Bill Hardekopf, CEO of

LowCards.com, advises that you make sure you're aware of such processes when you sign up for a new card.

Also, don't sign on to the wrong deal in the first place. Hardekopf learned that one the hard way years ago, when he got a card that gave him cash back toward the purchase of a

General Motors

(GM) - Get Report

vehicle. He accumulated around $1,800, and then when it came time for him to buy a new car, he felt stuck. He hadn't actually wanted a GM.

GM spokeswoman Kelly Cusinato pointed out that her company's cardholders always have the option of taking cash back and spending it on whatever they choose, including cars made by others.

According to the terms on the GM Flexible Earnings Card issued by

Household Bank

(HBC)

, you can earn a 3% rebate toward an eligible GM car but you would still get 1% if you wanted only cash back.

Even so, since Hardekopf felt he had to get a GM with his points or he'd waste his money, he's been driving one for years now.

"It was frustrating," Hardekopf says. "I still have this GM truck I don't like."

He recommends that you search for the card that suits your needs best.

Sonja Ryst has previously worked as a staff reporter at BusinessWeek.com and Dow Jones Newswires. She's also freelanced for publications including The Wall Street Journal. She graduated from Stanford University with honors.

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