BusinessWeek: November 28, 1994

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PLAYING YOUR CARDS RIGHT WHEN YOU USE PLASTIC

If, like many consumers, you plan to charge up a storm on gifts this holiday season, now is the time to make sure you're using the right credit card. Choosing among the thousands of offers for rebates or low-rate cards has gotten more complicated in the past two years. "You can save hundreds of dollars by making the right decision," says Ross Levin, president of Accredited Investors, a Minneapolis financial-planning firm.

Some of the rebate offers are so generous that you can make thousands back on your purchases over several years. Others offer more by way of gimmicks than rewards. At worst, the cards may entice you to rack up hefty balances and pay sky-high finance charges.

RAM Research in Frederick, Md., which tracks credit cards, estimates there are 25,000 different offers, with many banks promoting four or five deals to different consumers at the same time. This year alone, MasterCard has approved nearly 390 affinity programs (usually linked to a nonprofit organization) and co-branding deals (in which banks team up with car, oil, retail, or travel companies). This year's more-creative offerings include the Rolling Stones Visa, which gives discounts on the group's merchandise, and the South Orange (N.J.) MasterCard, which pays 1% of what you spend to the town coffers to keep taxes down.

Choosing a credit card purely on the basis of the rebate offered can be seductive, but it is a lot smarter to consider first how much the card will cost you. This is more difficult than merely checking the rate and the annual fee: You have to read the fine print.

It has become standard for cards to offer an introductory rate for the first year. Avoid cards that jump more than 7.9%, says Robert McKinley, president of RAM Research. Rebate programs typically charge higher rates than cards you can get elsewhere, so if you carry a balance, look instead for the lowest-rate card you can find. "Perks should be secondary," says Anne Morgan Moore, president of Synergistics Research, a market-research firm in Atlanta.

KEY WORDS. Check how finance charges are calculated. Most cards use the "average daily balance" method, so you effectively lose the grace period on new purchases as soon as you carry a balance into the next month. American Express has brought this issue to the fore with its Optima True Grace card, which has no fee and a 25-day grace period on all charges. But the card has been criticized, since many consumers who carry a balance would do better in a lower rate card than Optima, which jumps to 16.5% after six months. Even people who don't carry a balance need to check provisions for finance charges. Some low-rate, no-fee cards, such as Bank of New York's Consumers Edge, have no grace period.

Another trick: Promises of huge credit lines may turn into a minuscule limit when the card arrives in the mail. "There are two little words to watch for: `up to,"' says Ruth Susswein, executive director of Bankcard Holders of America (BHA), a nonprofit consumer advocacy group. A promise that you qualify for a credit line up to $10,000 might actually result in a $1,000 spending cap. Also, promises of no annual fee may be for only the first year or require you to use the card a set number of times each year.

Once you've figured out how much the card will cost, you can consider the gains from the rebate program, which can be substantial if you pay the balance each month and charge as much as possible to the card. You can now pay with plastic for things you never could a few years ago: doctor's bills, college tuition, movies, and groceries. Three years ago, 500 supermarkets were accepting MasterCard. Now, 12,000 take the card.

Cards that offer rebates toward cars and frequent-flier miles can be the most lucrative. With the General Motors card, you can earn as much as $3,500 in rebates over five years. Cards that offer cash back, such as the Discover Card, are the least generous. "The less choice you have, the more dollars you're going to get," says Michael Auriemma, president of Auriemma Consulting Group in Westbury, N.Y. He uses NationsBank Start card, in which 1% of the first $5,000 spent is contributed to an annuity. "I know I'm going to retire," he says. "I don't know if I'll want to buy a GM car."

You have to factor in your spending habits, card costs, and the value of the rebates. BHA has done cost-benefit analysis for the major programs and various spending patterns. A typical spender has an annual charge volume of $2,200 and carries a balance of $1,100. With Citibank's AAdvantage card, this person would pay $233.15 in annual fee and interest charges and earn one-tenth of an American Airlines ticket in a year. But with the Federal Savings Bank card, a low-rate program with no rebates, the total cost would be only $125.62. Someone who charges $20,000 a year and pays off the balance in full would earn a free ticket, spend only $50 on the annual fee, and pay no interest charges, for a net benefit of $450, assuming a ticket costs $500.

To order BHA's analysis of frequent-flier programs as well as other major car, oil, and cash-back rebate programs, call 703 389-5445. The six-page brochure costs $5. Also for $5, you can order an issue of CardTrack (800 344-7714), a monthly consumer newsletter published by RAM Research.

CHURNING. For the most reward, you might combine several programs. One simple idea: Watch the maximum you can earn in each program and, when you max out on one, switch to another. But consumers devoted to finding loopholes, dubbed "gamers" by the card industry, have come up with more complex techniques. One of their favorites is to churn balances. Issuers make this easy by mailing balance-transfer checks with card offers. You can often earn double rebate points by charging purchases on one card and transferring the balance to another. Or, if you carry a balance, take advantage of a low introductory rate on one card and, when it expires, switch to a new low-rate offer. Even trickier: If you carry a balance but want to earn rebates, charge purchases on a rebate card, then transfer balances to a low-rate card. Wachovia Bank (800 842-3262), which charges the prime rate (currently 7.75%) for the first year, allows unlimited transfers.

To discourage card-hopping, some banks offer rebates to folks who carry balances. AT&T Universal Card, which has a rate of 17.65% for new members, awards one point for every dollar of monthly balance and 10 points for every dollar spent on phone calls in its discount program. Rewards based on balances are "problematic," says Susswein, since most people are better off with a low-interest card. But Mellon Bank's CornerStone card, which charges a 19.65% rate and promises to refund after 20 years all the interest paid, may make more sense than a low-rate card for customers who stick around.

One final point: When you're ready to cash in your rebates for a new car, be sure to negotiate a price before you mention the rebate. You would hate to have all those points faithfully accrued over the years get lost in negotiations. Credit cards can be convenient and rewarding, but you need to choose the right one and know how to play the game.



                 Some Credit-Card Deals
                INTEREST        ANNUAL
CARD                    FEATURES (SIMILAR CARDS)               RATE*  FEE**
VOLKSWAGEN VISA         5% rebate toward the purchase of a     16.65%  $20
MBNA AMERICA            new Volkswagen. Yearly cap of $700
                        and five-year cap of $3,500. (Ford,
                        General Motors)
SHELL MASTERCARD        Earn 2% toward gasoline purchase        17.4    $20
CHEMICAL BANK           up to $70. After that, earn 1% on
                        purchases chases. (Exxon, Quaker
                        State, Sunoco, Citgo)
AADVANTAGE VISA/        Earn frequent-flier miles toward        17.15   $50
MASTERCARD CITIBANK     a free ticket on American Airlines.
                        (British Air,  Alaska Airlines,
                        Continental, Northwest, TWA, USAir,
                        United)
KROGER MASTERCARD       Spend $500 to $2,499 at Kroger's        16.15  none
FIFTH THIRD BANK        supermarkets and receive 1% back
                        in Kroger shopping rebates. Spend
                        more than $2,500 and earn 2% back.
CORNERSTONE MASTERCARD  Interest charges are refunded fully     19.65  none
MELLON BANK             when account is 20 years old or
                        partially between 2 and 19 years.
GE REWARDS MASTERCARD   Offers coupons redeemable at 32         18.65  none
CARD GE CAPITAL         companies. Has a tiered rebate
                        structure: Earn 0.5% when purchase
                        up to $2,000, 1.5% up to $6,000.
APPLE COMPUTERS         Earn 2.5% on purchases up to            16.65   $20
VISA/MASTERCARD         $3,000 and 5% over that amount.
                        Rebate capped at $500 a year; $1,500
                        over three years. Can donate
                        rebate to schools.
DISCOVER CARD           Receive up to 1% cash back on           19.8   none
DEAN WITTER             purchases. Calculates interest
                        based on average daily balance over two
                        cycles, which may increase costs.
*As of 11/14/94 **Many cards waive the annual fee for the first year or over certain balances.  DATA: RAM RESEARCH CORP., COMPANIES


Amey Stone By EDITED BY AMY DUNKIN
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