Credit cards entice customers with cash

By Christine Dugas
USA Today

Cash is king in the credit card rewards programs these days.

The latest example: Discover Card is kicking off a special offer of up to 10 percent cash back on restaurant meals charged to the card in September and October. The promotion follows a similar offer on grocery purchases made in April, May and June.

Discover pioneered cash-back rewards in 1986. Since then, others have followed. About 1 billion, or 25 percent, of all credit card solicitations last year involved cash-back rewards, according to industry tracker CardWeb.com. That's up from 700 million in 2002.

Cash is dethroning long-dominant airline rewards. One reason: "Finding free airline seats is harder with tighter inventories and more red tape," says Robert McKinley, CEO of CardWeb.

Among other cash-back rewards:

• Fifth Third Bank unveiled its cash rewards MasterCard in 2003. Card holders receive 1 cent per dollar they spend, up to $500 in rewards a year.

It attracted more than 20,000 new card holders in the first 15 months, the company says. And cash-rewards card holders spend 90 percent more per billing cycle than all other Fifth Third card holders.

• American Express last year promoted its Blue Cash card with a free Sting concert in Chicago. Blue Cash card holders get up to 5 percent cash back on purchases.

There is no standard formula for cash-back reward programs. Most offer 0.85 percent to 2 percent cash back on purchases.

At first glance, the rewards may seem better than they are. But many have a tiered formula. For instance, at Discover you earn 0.25 percent on the first $1,500 you charge per year, or $3.75. The reward increases to 0.50 percent on cumulative annual charges of $1,500 to $3,000, and 1 percent on charges that exceed $3,000 during a year.

During the restaurant bonus promotion, Discover will add 4 percentage points to the regular cash-back reward.

To get to the 10 percent bonus level, you have to have annual charges of $3,000 and use the cash bonus at one of Discover's retail partners that offer to double the rewards.

Some cards, such as Blue Cash, offer a higher reward to consumers who carry a balance.

"That's a disaster because it's an incentive to increase your indebtedness," says Ken McEldowney, executive director of Consumer Action, a consumer advocacy group.

Despite the problems using some airline programs, they deliver more bang for the buck. For example, one air mile typically carries a value of 2.5 percent of the amount charged, McKinley says.