No-fee cards rewarding, but seldom free -- page 2

The object is to encourage you to use that plastic as much as possible. Issuers make money two ways: merchant fees (that merchants pay when you use the card) and finance charges and penalty fees (that consumers pay). Some cards offer more points if you carry a balance.

"The banks that are offering revolving products are clearly hoping the customer revolves [the balance]," says Michael Staten, professor and director of the Credit Research Center at Georgetown University. "Clearly that's where the bulk of their revenues are coming from."

Rewards card users fall into two main categories, says Tom O'Donnell, senior vice president with Bank One, which will become J.P. Morgan Chase on July 1. "Spenders" put a large number of their purchases on the card and pay it off every month. "Blenders" will keep a revolving balance, using the card and paying off a portion every month.

The best deal for consumers: Pay the balance off every month. "Go ahead and take a [rewards] credit card, but you have to commit to discipline," says Daly.

Before you sign up for a card, here are some questions to ask:

What's the annual percentage rate? If you pay off your balance in full every month, theoretically the APR shouldn't matter. But odds are it will affect you at one time or another, says Robertson, who adds that 75 percent of active credit card accounts pay finance charges at least once a year.

"And you want to know whether that's the permanent rate or the teaser rate," Staten says.

In addition, many banks will pull your credit report every so often and adjust your rate accordingly. The potential impact: A late payment on another bill could increase the APR on your rewards card.

What's the grace period? Pay your bill late and the bank could ding your credit or raise your interest rate. So how much time do you have to pay it on time? And what's the fee if your payment arrives after the buzzer? Since a late fee or two can add up to more than an annual fee, sometimes a card with an annual fee and a longer grace period is really a better deal for you and your credit score.

What happens to your points if your payment is late? Some cards will ask you to forfeit your points that month or freeze your points until you pay a penalty fee, says Robert B. McKinley, CEO of CardWeb.com, a site that tracks the payment card industry.

Which rewards program makes the most sense for you? What is it you want to earn and which program gives you the best chance of getting it?

How do you redeem your rewards? Be very specific. How long do you have to wait before you redeem your points or cash? Do you have to accumulate a minimum of points or be in the program a certain length of time? How long before your reward points expire? And what do you have to do to redeem the reward?

How can you maximize your rewards? Sometimes issuers will add to the value of your points if you spend your rewards with one of their business partners.

Is there a cap on the reward? Some cards will pay rewards only up to a certain amount and then cap the rewards. So if you plan to keep charging and want to keep earning points, switch to another card.

What are the restrictions? If you are using your rewards to plan a trip, learn about all the restrictions and blackout dates.

Will this program be around when you're ready to claim your prize? McKinley once had his eye on an African safari offered by one card-rewards program. "When I finally had enough points, it wasn't in the catalog," he says. McKinley went to Paris instead.

Bottom line: Rewards programs can be altered or discontinued with very little notice. "There's very little consumer protection in these programs," says McKinley. "If you're worried about that, think one year out -- two years max."

Is it really a no-fee card? Some no-fee cards add a fee if you want a particular rewards program. One example: Bank One's design-your-own reward program carries a fee if you want to add airline miles to your card, says Chamberlin.

What is the reward really costing you? If you're paying nothing for the card, paying off the balance every month and earning free baseball tickets, a rewards card is a good deal. If you slip up, measure a couple of late fees or finance charges against the prizes you're earning. Would it have been cheaper to buy those goods or services outright?

And ask yourself how much you charge. "You have to do the math," says Arnold. Some rewards programs are tiered, meaning the more you charge, the higher percentage you get in rewards. But "tiered rebates favor heavy chargers," he says. His rule of thumb: If you're spending $6,000 or less annually, you're better off with a flat-rate plan that will start rewarding you with the first dollar you spend.

The next wave
So what's ahead for no-fee rewards cards? Look for banks to team up with retailers and others to appeal to diverse segments of the population. Some recent examples: Sony, AARP, Disney, Starbucks and Mary Kay.

And as the partnerships continue, expect to see more opportunities to "purchase special offers that go only to card members, regardless of how many points you've accrued," says O'Donnell. Recent examples: invitations to coffee tastings, special merchandise offers or preferred seating at concerts.

Look for some debit users to gain access to rewards programs in an easily redeemable, more modest version, says Robertson. And soon some customers who have debit and credit cards from the same bank will be able to "combine rewards points," he says.

But Robertson believes that the cost of borrowing money can only go up, and that will impact no-fee incentive programs. "If your card has no annual fee and you're getting money at next to nothing and on top of that they are throwing a rewards program into the mix, that's as good as it gets," he says.

But don't expect that Nirvana to last forever, he says.

"In the future, issuers will find ways to offer their rewards to revolving credit customers," Robertson says. "Other kinds of rewards will be offered to people who pay in full or almost always pay in full, and those will be the people who will always pay an annual fee."

Dana Dratch is a freelance writer based in Atlanta.