Winning at Cards
Some Spenders Think They Have the Discipline to Play the Risky Rewards Game

By Nancy Trejos
Washington Post Staff Writer
Sunday, November 4, 2007

Michael Cheng and his wife, Nicole, each have four credit cards in their wallets. A Post-it note on the top left corner of each card lets them know which one to use for what.

The Chase rewards card is for groceries, gasoline and drugstore purchases. The Chase business card is for gas stations, home improvement and office-supply stores and restaurants. The Discover card is for restaurants and movies. The Farm Bureau Bank card is for everything else.

In return for their purchases, they get checks or gift cards: 5 percent cash back from the Chase rewards card, 3 percent from Chase business, 5 percent from Discover and an amount equal to 1 percent from the Farm Bureau.

The Chengs, who have a stack of other cards, keep track of the cash rewards on a spreadsheet: They made $1,121 in 2006 and $1,093 so far this year. They don't pay interest on their purchases because they immediately pay off their balances. They pay no annual fees.

"We get the sense that we figured out how to play the game and we're playing it our way," said Nicole Cheng, 43, of Centreville.

That game is played by so many that there are numerous Web sites such as CardWeb.com, Credit-reviews.com and Creditcardgoodies.com that rate the programs and provide venues for cardholders to seek and give counsel. Some of the most avid users are those who get cash back, a segment of the industry that has grown rapidly in recent years.

If you're going to play the rewards game, beware: The credit card issuers are certainly up to the challenge, several consumer advocates said.

"There's a small number of people who can game the system, but for every consumer who games the system there's probably 25 consumers who are ratcheting up credit card debt and never are redeeming the rewards," said Ed Mierzwinski, consumer program director for the U.S. Public Interest Research Group.

Be prepared to spend a lot to make a lot -- or a little. So far this year, the Chengs have spent $47,800 to get $1,093 in rebates. "Mind-boggling," Michael Cheng, 42, admits.

The only way to make the rewards cards rewarding is to be disciplined. Card issuers divide their clients into two categories. Transactors pay off their balance each month; revolvers carry balances.

If you're a revolver, don't bother with a rewards card. Whatever you earn is not going to make up for what you pay in interest. The cards with the best rewards tend to have higher rates.

"If you carry a balance on your credit card, a 1 percent reward does not in any way offset a 15 to 25 percent APR," Mierzwinski said. "For consumers who carry balances, they rationalize that at least the reward is cutting it a bit, but you're much better off getting the best rate you can."

Be sure to understand the rules, consumer advocates and credit card experts said. Many people don't. In a survey conducted last year by Braun Research of Princeton, N.J., one-third of 1,000 cardholders surveyed said they either don't read or don't understand the fine print contained in credit card offers they receive by mail.

"The big print giveth and the small print taketh away," said John Ulzheimer, president of consumer education for Credit.com.

Many card issuers reserve the right to void rewards if a payment is late, and they can limit the amount of cash or number of points redeemable. Or they might require that the rewards be redeemed within a certain time frame. Sometimes, rewards can be hard to claim, particularly airline miles.

Working hard to entice customers, card issuers have increased the number of rewards programs. They have also gotten more creative with the programs.

Take the Citi Home Rebate Platinum Select MasterCard. Cardholders can use the points to pay down their mortgages. For big spenders, the recently launched Sotheby's MasterCard offers a helicopter tour of California's wine country or the use of a Sotheby's auctioneer to conduct a charity auction of your choice. If you're a college student, you can earn points for having a good GPA and redeem them for plane tickets, CDs and other gifts. And with gas prices skyrocketing, credit cards that offer cash back at the pump are popping up almost everywhere.

"There's just about a reward for everything you might want there to be a reward for," said Bill Hardekopf, chief executive of LowCards.com.

So it's no surprise that big game players like the Chengs have 20 credit cards. Most of the cards are stashed in a drawer, until the Chengs receive a letter notifying them that the card issuer is offering a good cash-back promotion. "Most of them will come up with something at some point," said Michael Cheng, who prices government contracts for Verizon.

How many does Warren Wilkins have? "I don't even know," said Wilkins, 69, a retired lawyer who lives near Richmond. He believes he has six to 10, but actively uses three. "It's great to pick up $1,000. It's just a freebie," he said.

But credit card experts and consumer advocates said some card companies, taking notice of customers like the Chengs, are not as generous as they used to be or are making the programs more complicated. Gone are the days of 5 percent cash-back deals. Now, 1 percent cards are more the norm. Other companies have created tiered programs as a way to encourage spending, giving a higher percentage of cash back the more the consumer charges.

Citigroup, for example, cut rewards earned by holders of the Citi Dividend MasterCard to 2 percent from 5 percent. American Express slashed rewards points by half for everyday purchases at gas stations, drugstores, supermarkets and other places.

"It seems that a lot of the issuers maybe were taken aback that so many cardholders were maximizing the rewards and the banks were losing money on them," said Joseph Ridout, a spokesman for the advocacy group Consumer Action.

Card company representatives say the cardholders who do not keep balances will not necessarily hurt a program. "We don't look at it from the individual customer level but we look at it overall as a program, is it something that is maintaining profitability?" said Raja Rajamannar, executive vice president of Citi Cards.

Mark Shipley, senior vice president and global practice leader for Loyalty Solutions at MasterCard, said cash-back programs are not what they used to be. "Cash-back used to be easy," he said. "They are getting more and more complicated today."

That hasn't stopped people like David Tay, 37, from going to great lengths to get good deals. Tay, of South Riding, saw an advertisement for a Pentagon Federal Credit Union card offering 5 percent cash back on gas purchases and 1.25 percent on everything else.

There was a catch, though: You had to be retired or active military, or have family in the military to get the card. Tay met neither criteria; he is a network engineer for Deloitte & Touche. Then he read the fine print. He would be eligible if he joined the nonprofit National Military Family Association for $20, so he did.

"Based on what I see, it looks like a worthwhile organization," he said. "They're supporting military families."

Card companies change or suspend programs without much notice, as Tay found to his dismay.

He was not happy after the rules changed on his Discover card this fall. He got 5 percent cash back for gas and auto maintenance costs, and could collect up to $1,200 a year. Then he noticed a restriction that allowed him to collect only $100 per billing cycle. It won't take too many visits to the pump to get to that point. "It's kind of limited in its usefulness," he said.

Shipley said card companies are cautious when altering programs. "You're dealing with your best customers and we're really trying to go over the top to create a very happy experience," he said.

Ulzheimer of Credit.com has another warning for overly enthusiastic cardholders: Too many requests for new lines of credit can hurt their credit scores.

"What I've seen in many of these cases, consumers will at their own peril apply to so many credit cards that they end up costing themselves more in the long term," he said.

If anything, think about this. Someone is paying the price for your financial gain, consumer advocates said, and that someone is everyone. Card companies make money off the rewards cards by charging merchants fees. The merchants then pass the costs of the fees on to all consumers by raising prices.

"Somebody pays for rewards and the people who pay for rewards are actually people who shop and don't use credit cards," Mierzwinski said.