Who doesn’t like getting something for nothing? And who doesn’t like credit card rewards, which appear to deliver precisely that? Of course, you probably learned at your mother’s knee that nothing comes from nothing, and that something for nothing doesn’t really exist. As always, Mom was right.

Credit card rewards are paid for

Most credit card companies view their rewards programs as essential marketing tools, and fund them from all their different revenue streams. However, key among those streams are “interchange fees” (also known as “swipe fees”, see Credit card companies likely winners in Senate battle this week), and some argue that such fees are effectively a tax on purchases.

They are the cut of the transaction value paid by merchants to banks every time a card is swiped. But few merchants are likely to cover that cost out of profits, and, instead, most raise prices. Those higher prices are generally paid by everyone: rich and poor, cardholders and non-cardholders.

Credit card rates higher on rewards cards

Of course, another important source of income for card issuers is the interest they charge on those balances that are carried forward. And credit card rates tend to be higher on cards with rewards programs. Indeed, at the time of writing, the Index Credit Cards rates monitor says that the average rate on a consumer non-rewards card is 15.09 percent annual percentage rate (APR), while that on a consumer rewards card is 17.48 percent.

Regular readers of this blog won’t need a picture to be drawn for them: use low-interest credit cards for purchases that can’t be paid in full when your next statement falls due. Only use rewards cards for transactions that you plan to clear at the end of the current billing cycle.

Credit card rewards are great… and (mostly) getting better

But all this is quibbling. The bottom line is that most credit card rewards programs are already good, and getting better. Last Thursday, The Richmond Times-Dispatch carried a story that identified a couple of things to look out for:

1. Sign-up incentives–mostly available to those with near-perfect credit, but some of today’s deals are truly remarkable.
2. Continuing rewards–these, too, are notably generous at the moment. Another tip: shop around for the best deals; they’re worth seeking out.

Credit card terms change

The day before that story appeared in The Richmond Times-Dispatch, The New York Times published a reminder of the importance of keeping an eye on your credit card terms. These change from time to time, and occasionally a rewards program that started off as being unusually generous may be watered down. So, if you want to be sure of always getting the best from the plastic in your wallet, you need to find time to compare deals regularly.

Published 06/07/11