Office of Consumer Affairs and Business Regulation’s Credit Card Survey Finds Cash Back Rewards Come With Mixed Bag of Benefits and Burden
BOSTON – The Patrick-Murray Administration’s Office of Consumer Affairs and Business Regulation today announced the results of its credit card survey, completed in March 2013, which compared 19 popular cards and their associated rewards, fees, and interest rates, and found that while companies offer a myriad of rewards they often come with a price in the form of higher interest rates.
“Consumers need to carefully consider whether a rewards card will benefit them based on their own spending habits. Financial products never come in a one-size-fits-all package,” said Barbara Anthony, Undersecretary of Consumer Affairs and Business Regulation. “Consumers struggling with credit card debt should not be motivated to spend more in order to earn rewards. If you carry a balance continuously, savings from a lower interest rate card may exceed the value of any cash back, points or miles connected with high rate rewards cards.”
Consumer Affairs staff conducted the survey using research from credit card company marketing materials, phone calls and online information from the cards’ websites. Researchers compared 18 credit cards and one charge card.
The Office of Consumer Affairs found that rewards cards tend to have higher interest rates than non-rewards cards, and those with lower annual percentage rates (APRs) offer the rate based on an individual’s creditworthiness. Most of the cards surveyed had high penalty APRs that kicked in after just one late or missed payment, with many increasing by 10 percent or more. The survey found:
- 12 cards have a 0 percent introductory APR for varying periods, from six to 12 months or billing cycles, or until a specific calendar date;
- After the end of the introductory APR period, rates increase to varying percentages, from 9.9 percent up to 22.99 percent, depending on market prime rates and creditworthiness;
- Penalty APR rates vary from 15.9 percent up to 30.24 percent. Penalty APRs can set in after a late or returned payment and can apply until the consumer reestablishes creditworthiness for a specific number of billing cycles, or even indefinitely;
- Some credit cards do not charge a penalty APR; three of the credit cards charge a $35 late payment fee; and one card charges both a penalty APR and a late payment fee.
The Office of Consumer Affairs advises that the ideal users of rewards cards are those who can afford to pay their balance in full each billing cycle and will utilize rewards to their full potential. For example, a card with rewards miles can benefit consumers who travel long distances for work or leisure. Some cards surveyed offer miles for any purchase, while others calculate bonus miles per dollar spent. Other cards offer fuel credits with some cents off per gallon, which will benefit consumers who make frequent trips to the pump.
The survey focused on how cash-back rewards functioned and found that seven cards offer a cash-back feature and that the process for earning cash back differed by card. For example, some cards offer 1 percent cash back on all purchases with a 50 percent bonus on cash back earned every year, while some cards offer varying percentages for different categories of merchants. Most cards limit cash back rewards to “qualified purchases,” which may not include more popular transactions.
Researchers found that the definition of redeeming cash back varied by card. In some instances, cash back was offered through a check or electronic deposit to a checking or savings account. Other cards put cash-back rewards towards the next statement credit. In one instance, the survey found that cash-back rewards were redeemable for cash only in $50 increments.
“Our staff found it was hard to drill down to what the term ‘cash back’ actually meant. We had to really weed through the fine print to make heads or tails of it all,” said Undersecretary Anthony. “Navigating cash back rewards can be really complex. In one instance, one of our researchers called a company asking for a list of eligible purchases but was given a list of meaningless codes. When companies conduct business this way, it can be really difficult for consumers to know what they’re signing up for.”
Before applying for a credit card with cash back rewards, consumers should ask the card issuer specific questions about how to earn and redeem the rewards, including what is considered an eligible purchase, whether rewards are available monthly or annually, whether rewards go into a bank account or put toward the next bill, and if there are any limits on rewards. Cash back rewards can benefit shoppers who frequent specified retail establishments, but consumers should read all terms and conditions on the card to see if cash back rewards will actually save them money.
One of the current trends of rewards cards is to offer customers other discounts, amenities and fee waivers beyond points, miles and cash back. For example, many airlines grant lounge access, allow priority boarding and waive checked baggage fees for their cardholders. Other cards offer concierge services and preferred access to concerts and sporting events.
Before applying for a rewards card, consumers should compare the features of each one. Important features to look for include:
- Rewards: Consider carefully: are the rewards things that you want and use, and are they the best package available based on your habits? Those who carry a balance should reconsider applying for a rewards card, since by pursuing rewards cardholders with a balance may lose the opportunity to receive lower interest rates offered on non-reward cards.
- Interest rate: One of the most important things to understand about a credit card is the interest rate. The lower the rate, the less expensive the card will be. For consumers who carry a balance, it is best to choose a card that has a low APR.
- Introductory interest rate: Check a card’s introductory interest rate, which is lower for a short period of time then jumps after the introductory period is over. The company can raise the interest rate after the promotional period with proper notice. However, the promotional period must be at least six months long.
- Penalty charge and interest rate: Five of the cards surveyed do not impose penalty rates. For card issuers that impose a penalty rate, the penalty APR may apply indefinitely. Penalty charges and rates are often applied if consumers make a late payment or make a payment that is returned. Under the Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2009, interest rate increases must be explained to you and the credit card company must re-evaluate that rate increase every six months. The company must reduce your rate within 45 days of the review, if it determines that a decrease is warranted.
- Grace period: The longer the grace period, the longer you have to pay off your balance before paying interest charges. Most credit cards do not give a grace period for cash advances and balance transfers. Without a grace period, interest can begin to accrue at the time of purchase, before you actually receive a bill.
- Fees: Most credit cards have fees. Look for membership fees, application fees, balance transfer fees, cash advance fees, annual fees, and others that may apply. You will want to read your credit card agreement carefully to make sure you understand all the fees associated with the card. If you use your credit card often, the presence of significant rewards may make up for a small annual fee.
- Credit limit: The lender may tell you how much of a credit limit to expect, or up to a certain amount, based on your creditworthiness. An “excellent” credit rating from one credit card company may be viewed by another as “very good.” There is no standard definition of creditworthiness, and each company will make its determination based on your credit scores and credit report. The three credit reporting companies use different calculations for credit scores, and the information on your credit report may vary.
The Office of Consumer Affairs and Business Regulation is committed to protecting consumers through consumer advocacy and education, and also works to ensure that the businesses its agencies regulate treat all Massachusetts consumers fairly. Follow the Office at its blog, on Facebook and on Twitter @Mass_Consumer.