Discover's Cash-Back Promotion Pays Discover

The Discover (DFS) credit card company, in a bid to be the choice of holiday shoppers, is starting a 2% cash-back program Nov. 15 and letting it run through Dec. 31. The deal, not the best the company offers, doubles the card's usual cash-back option.

There are limitations for the promotion, which can be used with the Discover More, Motiva and Open Road cards: Customers must sign up on the Web, and the deal is good for up to only $1,000 in purchases.

What do consumers actually get out of that additional 1%? Up to $10.

That might not buy much more than a stocking stuffer for your kids, but it works out to be a nice gift for Discover itself.

While the cash-back option cuts into the "swipe" fees that card companies charge retailers, analysts say the added sales generated by the perception of a deal can make up for that. The National Retail Federation already expects holiday spending -- usually beginning on Black Friday, the day after Thanksgiving -- to rise 2.3% this year to $447 billion, even though an estimated 5% of consumers are dragging around debt from last year's holiday spending and the economy is hardly surging.

The option -- already widely hyped -- could be a boon for Discover, which traditionally lags behind such competitors as American Express ( AXP), Visa ( V) and MasterCard ( MA).

Odysseas Papadimitriou, CEO and founder of CardHub.com and a personal finance expert, isn't so sure.

"I'm skeptical as to how much this deal will truly boost Discover's bottom line," Papadimitriou says, suggesting the limitations of the deal are too obvious to consumers. "If a customer with excellent credit is looking for a good credit card deal this holiday season, they're much better off applying for a card like the Discover More card that gives them $100 if they charge $500 on it in the first three months, or the Chase Freedom card that gives them $100 back on the first $800 charged on the card in the first three months."

While credit card companies have been using seductive cash-back techniques for years, their efforts are getting more sophisticated and aggressive, he says. What's interesting with Discover is that "instead of going for a particular segment of consumers, they are offering this promotion across the board."

"I do not think that this will prove to be as effective of an approach as opposed to targeting a specific group," he says, "such as a promotion for customers who have not used their credit card in the past six months."

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