Your first boss was right: There is no free lunch. But if you pay for lunch often enough, someone, somewhere down the line, might throw in a free cookie. That's basically the philosophy behind rewards cards — credit and charge cards that partner with various merchants to reward you, now and then, for spending money.
The first rewards card, launched in 1985, was Discover, which offered users a rebate of 1 percent on all purchases. Since then, credit- and charge-card issuers have teamed up with companies ranging from airlines to retail stores to automakers, creating literally thousands of rewards-card programs. Here, the lowdown on the most popular types of programs, plus details on standout cards in each category. Ka-ching!
How Reward Cards Work
Say you love books, so you get a Barnes & Noble MasterCard. Whenever you use it, a percentage of every dollar you spend — anywhere — comes back to you as rewards points. And when you use the card at Barnes & Noble, you receive even more points. When
you build up enough points, you can start spending them at Barnes & Noble. Merchants usually pay most of the cost of rewards (in this case, books) as a way of promoting customer loyalty. And because people tend to spend more, and more often, when using rewards cards, card issuers like MasterCard benefit by collecting more
transaction fees from vendors (who pay 20 to 30 cents to MasterCard, Visa, or American Express every time a customer uses a card to make a purchase). As long as you avoid racking up interest charges on unpaid balances, you benefit, too — by getting something
back for all your hard shopping.
Should You Get One?
If you're the kind of person who doesn't pay off your credit-card balance each month, the answer is probably no. Instead, you should look for the lowest fixed interest rate you can get. (You're more likely to get a low fixed rate with a nonrewards card. Compare rates at
www.bankrate.com)
If you don't carry a balance and decide to get a rewards card, make sure that the potential rewards outweigh any annual fees. If a card offers 5 percent cash back on purchases, for instance, you would need to spend about $2,500 just to pay off a $49 annual fee. Most cards offer far less generous rewards: You would probably have to spend about $7,500 a year to ensure that the value of air-travel rewards justifies what you're paying for the card, according to Randy Petersen, president and CEO of Frequent Flyer Services, a Colorado Springs-based travel publishing company.
Next page: Our rewards card picks.
