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Rewards cards aren’t for everyone. They usually have a higher interest rate, so they only make sense for people who pay off their balance in full each month.
By Herb Weisbaum ConsumerMan
msnbc.com contributor
updated 6/18/2008 3:28:28 PM ET 2008-06-18T19:28:28

Whenever possible, Curtis Arnold of North Little Rock, Ark. pays with plastic. “We use our card for literally everything,” he says. “Any purchase over $5 we put on our credit card and we do that to maximize our rebate.”

Along with the basics – food, gas, restaurant meals, and travel – Arnold and his wife use their credit card to pay medical bills and make charitable contributions. Their monthly cell phone bill is automatically charged to the card.

“I’m really hooked on them,” he says. “I derive extreme satisfaction from having the credit card companies pay me back.” It’s easy to see why. Last year the Arnolds made $1,000 by using their cash-back card.

Arnold, who founded the website CardRatings.com, knows there’s a dark side to reward credit cards. “Studies have shown that consumers do spend more on reward cards,” he says. So you have to be very careful.

Get caught up in the reward card craze and you can easily bust your monthly budget. But Arnold tells me, “I’m living proof that if you know how to leverage these cards, you can use them to your advantage.”

The Arnolds treat their cash-back credit card as if it were a debit card or cash, and only use it for purchases they would normally make anyway. “If you get a reward credit card,” Arnold says, “you want to be disciplined and prudent about how you use it.”

Even so, rewards cards aren’t for everyone. They usually have a higher interest rate, so they only make sense for people who pay off their balance in full each month.

“If you carry a balance even occasionally, forget about rewards cards,” advises Greg McBride, senior financial analyst at bankrate.com. That interest will more than wipe out any rewards you earn.

Beware of the ‘gotchas’
Credit card issuers have created all sorts of rewards cards. You can get cash back, earn airline miles, or collect points that can be traded in for airline tickets, hotel stays, rental cars, cruises, gift cards or merchandise.

The ads make it seem so easy to earn a reward. In reality, it’s a lot harder. “You can get a small amount of what you spend back, but it can be very difficult,” says Amanda Walker, a senior editor at Consumer Reports. “There are lots of ‘gotchas’ with these cards.”

Reward programs are often complex. There may be limits on what you can earn each month or during the year. Rewards can expire. And you might not earn points if you pay late.

You may also have to spend a certain amount of money during the year to take full advantage of the savings. For instance, with the AmEx Blue Cash card (top-rated by Consumer Reports) you get a 5 percent rebate on purchases at supermarkets, gas stations and drug stores if you spend $6,500 or more. Spend less than that and the rebate drops to just 1 percent.

Choosing the right card
In its July issue, Consumer Reports compared various types of rewards cards and concluded that cash-back cards are usually the most generous. “You tend to get the highest percentage back for your spending and they’re the easiest to use,” Walker says.

Consumer Reports says cards that deal in points are often a little less generous. Airline cards are the most confusing. They tend to change the rules more than other rewards programs. And as anyone who’s ever tried to get a free ticket with miles knows, they can be difficult to use.

And that will probably get worse. With airlines cutting flights, there will be fewer reward seats available. You may soon have to pay a service fee to redeem those miles. Last week, U.S. Airways announced it will charge between $25 and $50 for all award tickets issued on or after August 6. Don’t be surprised if other airlines do the same.

Pain at the pump eased?
It’s easy to see why gasoline rewards cards are growing in popularity. They save you money with every fill-up. Use a card that gives you a 3 percent rebate and you’ll pay $3.88 for each $4 gallon you pump.

Just be careful to read the fine print when comparing gas cards. The rebate you see advertised in bold print is usually a teaser rate that only lasts for a short time. For instance, The Chase PerfectCard MasterCard (a Consumer Reports top pick) gives you 6 percent back on gasoline purchases for the first 90 days and then drops to 3 percent.

Some gas cards give smaller rewards for gasoline purchased at membership clubs, such as Costco, or discounters like Wal-mart. That’s important to know if you buy gas there.

My two cents
My wife and I have two rewards cards. We treat them like cash. The rule is: the bills are paid off in full each month. In return, we earn enough points to get at least two coast-to-coast round-trip airplane tickets each year. How can you argue with that?

I gave up on airline reward cards a long time ago. I don’t want miles I can’t use. I want points that let me buy tickets on any airline: no blackouts and no seat restrictions. If there’s a seat on the plane and I have enough points to buy a ticket, I can get on that flight.

The bottom line: If you pay your bill off in full each month, you might as well play the rewards game. But you must be disciplined enough not spend more in order to earn points, miles, or cash back.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
$30K HELOC FICO 4.38%
$30K home equity loan FICO 4.98%
$75K home equity loan FICO 4.40%
Credit card rates View more rates
Card type Today +/- Last Week
Low Interest Cards 10.87%
10.87%
Cash Back Cards 16.36%
16.36%
Rewards Cards 15.93%
15.94%
Source: Bankrate.com