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Airline miles! Cash back! Free stuff! Rewards points! Who could resist the joy of getting something simply for buying the things you normally buy, right? Who among those of us drawing breath and having a pulse haven't been asked by some store, bank, airline, or frequent buyer club to apply for their credit card because it has the best rewards around?
I can remember the first time I filled out a credit card application after college. It was on a whim at a gay pride event for the rainbow card, Martina Navratilova's project at the time. Who couldn't ride the energy of that event into free t-shirts, joint cards for your same-sex partner and rewards that went to LGBT charities for every dollar you spend? Since that time in the mid-90's rewards cards have become far more ubiquitous. With that surge has come the question - when does it make sense to use a rewards card and when is it a dangerous move?
The problem with rewards is that it can lull even the most disciplined person out of the mindset of using it as a method of payment and into a runaway black hole of living well beyond one's means. After all, I get cash back, right? Rewards points and cash back mean little if you are sink yourself in a sea of finance charges. It's sort of like spending $200 on boardwalk games at the Jersey Shore to win a free stuffed animal worth about $15.
Melanie Hobson of ABC News has this to say about choosing a rewards card:
Hobson said consumers should make sure their cards' rewards are easily redeemed, and they should pick a card with a program whose rewards will suit them. She also advised that consumers get only one reward card -- and only if that consumer is a disciplined shopper and pays off his or her balance on time. According to credit.com, having a rewards program attached to a credit card doubles the amount of spending on that card.
Digeratilife offers their take on the best credit card rewards programs and offers this wise bit of advice:
In general, you’ll need to gauge which rewards programs will provide you the most value and which are going to fit your spending patterns the best. And they’re also only worth applying for if you pay off your balance in full each month, because using rewards cards is generally more expensive than using other cards that may have more attractive rates.
The last sentence is where the real hidden perils surface. Not only can it be more expensive to you as the consumer to use these cards, but the merchant loses a bigger bite of their sale as well. While this is unlikely to make a dent in a large retailer it has a huge impact on small and solo businesses who accept credit cards as a means of payment. People just like me.
First let's be clear that it is very convenient and a great tool to be able to accept credit card payments as a business. It streamlines the collections process (no more "the check is in the mail" when payment seems to be taking so long that carrier pigeon would have been faster). It eliminates the bounced check problem. It allows you to business with other businesses who use credit cards to manage cash flow and/or make capital investments in their business before they have the funds to pay cash. It is certainly worth a small fee for this convenience and assurance. Yet, depending on the card someone uses, a merchant can end up losing multiple percentage points more of a sale.
Two articles from The New York Times offer a view into this side of the equation. "The Damage of Card Rewards" talks about how the reward cards act almost like a reverse Robin Hood scenario:
After all, the 1 to 3 percent or more of every transaction that merchants pay to accept the cards is a significant cost, and the small local retailers that make neighborhoods vibrant often pay a higher percentage.
Stores then build those fees into higher prices, so people who aren’t earning any rewards can end up subsidizing those who do. Many of these people have no credit cards because they’re financially troubled.
Retailers pay different amounts to accept the same, or similar cards. You can get a sense of a particular cards' cost to a merchant by entering the first
