Brian Turner, a senior at Nashville’s Fisk University is like most consumers: He has two credit cards and doesn’t pay them off every month.
But that now may not be seen as so big of a problem, thanks to the latest trend in rewards programs from the credit card industry that actually gives you a bonus for carrying a balance.
“It would be a good idea to know that I’d have some money coming [for having] a balance on the card,” Turner said. “It’s something I’d look into.”
It may go against conventional wisdom — and the advice of most financial experts — but 61 percent of Americans do carry a balance on their credit cards. And that accounts for the bulk of the industry’s revenues.
The most profitable customers that an issuer has are those who carry a balance. Offering some type of meager reward is something that diminishes the likelihood that these customers may defect to another issuer.
For example, a special student Visa credit card offered by Citibank promises up to 3 percent cash back when you carry a balance ... but there’s a catch.
“Almost all of students that I’ve discussed this marketing campaign with were astounded that if they demonstrated responsibility by paying bills off at the end of the month, they were getting penalized by not qualifying for the rebate,” said Robert Manning, author of Credit Card Nation and a visiting professor at Fisk, who teaches students the ins and out of credit card debt and encourages them to read the fine print on card offers.
It may say you can qualify for $150 cash back for year, but then there may be a limit that you can qualify for no more than $35 to $40 per quarter. So the fine print is increasingly reducing the rewards the consumer perceives they are going to receive.
Customers also have to decide whether incurring interest is worth the cash back or other perks they get. Citibank charges about 14 percent interest on the student Visa card.
Bank of America’s Money Return card refunds a tenth of the interest you pay each year, but the variable interest rate ranges between 12 and 17 percent.
Providian Real Rewards visa is currently being tested and rewards 10 “points” for every $100 you don’t pay off in full each billing cycle. The interest rate ranges between 10 and 13 percent.
Not all cash back offers require you carry a balance — but some will sweeten the perks when you do. American Express introduced its Blue Cash card earlier this year, offering big spenders who carry a revolving balance up to 5 percent cash back when buying gas or shopping at grocery, drug or home improvement stores. The interest rate ranges from about 9 to 13 percent.
“The cash rebate card does not want to [encourage] people to revolve if they normally wouldn’t, it’s just recognizing that there are some people at some particular time that have to, and it’s the best card for them,” said Larry Sharnak, senior vice president of consumer lending at American Express.
Yet, with the Federal Reserve continuing to hold interest rates at historically low levels, credit cards with lower rates than the cash-back variety are readily available.
“Anyone carrying a balance is better served [by] finding a lower rate card and working to accelerate their debt repayment,” said Greg McBride, an analyst at Bankrate.com.
One of Manning’s students offers another solution. “Once you get through all of the fine print, it’s still outrageous how much you pay if you don’t pay your bill at the end of the month,” said Kyle Parks. “So I still don’t have a credit card.”
That moves enables him to reap the biggest reward of all - no debt.