Credit cards reward the smartest users - Pay your bill monthly and gain more than a free loan

Credit cards reward the smartest users - Pay your bill monthly and gain more than a free loan
By Jim Gallagher, McClatchy
Copyright © 2010, Chicago Tribune
June 6, 2010
http://www.chicagotribune.com/news/sc-cons-money-0603-credit-card-20100603-15,0,1012730.story


A few months back, I got airline tickets for $50. Here's how I did it.

Several banks and airlines were offering airline credit cards with a $50 annual fee. Sign up, spend $700 on the card, and they would give you 30,000 frequent-flier miles. That's more than enough for a one-way ticket anywhere in the United States, and a round trip if you plan far enough ahead.

I'll use my free flights, then I'll cancel the card before the next annual fee comes due.

Credit cards remain the best way to rob a bank, if you pay the bill in full every month. Do that, and the bank gives you an interest-free loan until the due date. To top that, many cards will throw in extra goodies or cold cash. They will pay you for the privilege of lending you money for free.

There are hundreds of rewards credit cards on the market. They're a fine deal, so long as you pay the bill in full every month.

If you carry a balance month to month, the freebies are much less important than landing a card with a low interest rate. The average card now charges 14 percent interest.

"The rewards you get will be eaten up by the APR (annual percentage rate)," said Bill Hardekopf of LowCards.com, a Web site that tracks credit card offers.

Cash-back cards

Some cards are generous, others aren't. The simplest way to sort it out is to opt for cold cash.

A decent cash-back card has no annual fee. It will rebate at least 1 percent of what you spend, plus more for specified purchases. The Chase Freedom card, for instance, gives 1 percent on all purchases, plus 5 percent on a list of other items that rotate by season.

"Anytime you can get 5 percent back, it's nothing to sneeze at," said Hardekopf.

If you have a Fidelity investment account, the no-annual-fee Fidelity American Express Card will add $100 to your account for every $5,000 you spend on the card, a pretty good offer.

Less generous cards use a tiered system for rebates. The Discover More card, for instance, pays only 0.25 percent until you've spent $1,500, then 0.5 percent until you hit $3,000 and 1 percent after that.

Non-cash rewards

Things get more complicated when you opt for a card with goodies other than cash.

Look at the payout ratio, said Greg McBride, a senior financial analyst at Bankrate.com, which tracks both bank lending and deposit rates. How many points do you get for a $1 purchase, and how many will you need for that official NASCAR Jeff Gordon jacket? (13,700 points on the NASCAR Racepoints Web site.)

Look at your spending pattern, said McBride. If you're driving a gas guzzler on a 50-mile daily commute, a gasoline credit card might look sweet. The no-annual-fee Exxon Mobil MasterCard, for instance, gives you a 15-cent-per-gallon rebate at Exxon and Mobil stations, plus between 0.5 and 2 percent on other eligible purchases.

Credit score impact

My tactic of taking the airline miles, then canceling the card? Hardekopf and McBride note that I might do some damage to my credit score.

When I cancel the card, I'll be lowering my available credit. Credit scores are based, in part, on the percent of available credit I'm using. Less credit can mean a lower score. Scores also count the amount of time I've held my accounts, and canceling a card counts against me.

Don't do it if you plan to borrow money in the next six to 12 months, said McBride. I don't, so I'm happy to be flying cheap.