Tuesday, July 11, 2006

It's not your imagination.

There probably are more offers from credit card companies in your mailbox as the burgeoning industry desperately seeks new customers, even as most U.S. residents have more credit cards than they even use.

• Last year, a record 6.06 billion solicitations were mailed out, a new record.
• Only about 18 million of those offers, or about 0.3 percent, were accepted, also a new record.

Recognizing the need for better bait, companies are sweetening their offers with the promise of rebates or rewards, in which consumers spend, then get something back.

There is a card that pays down your home loans. There's one that provides rebates of up to 5 percent on the money you spend on gas. Even one that combines with credit card use. For consumers, the trend offers a chance to pursue rewards of almost any flavor.

It's also an enticement to spend more than you planned, letting things slip out of control, and leaving you with no choice but to apply for high-risk payday loans to get yourself out.

"If you have a high bill that you can't repay at the end of the month, the whole point of earning a 5 percent reward gets eaten in two seconds by the 18 percent interest rate," said Linda Sherry of Consumer Action.

Discover kicked off the trend in the mid-1980s with the offer of cash back on every purchase. American Airlines upped the ante, pairing with Visa to offer a frequent-flier mile for every dollar spent. Companies have been creating variations ever since. Typical cards offer about 1 cent back for every dollar spent in the form of cash, goods or services.

"We're hoping to build spending and loyalty," said Mike Sisko, president of American DreamCard LLC.

The industry has tried other gimmicks to increase spending and loyalty as well, such as ranking cards with the names of rare metals. Companies told customers that gold cards meant they were special. But as it became clear that many people were also getting gold cards, the idea lost its cachet. Instead of the feeling of exclusivity, people grew jaded as consumer debt grew rampant.

Yet studies show that people care more about a card's rewards than about the interest rates, the credit limit or any other feature. Facts like that show just how big a problem debt can become, and why the no faxing payday loan business has grown so fast in the past decade.

Programs fall into a few basic categories:

1. The classic cash-back rebate. Customers receive a fixed percentage of the money they spend.
2. The affinity rewards program. The customer chooses a theme, such as boating or the Yankees or New York City, and accumulates points toward related rewards.
3. The general rewards program. Increasingly, card companies are offering their own rewards, which offer a wide range of prizes, such as points towards flights on a range of airlines.

Like so many things in life, it's all well and good until you get carried away. Do you have the level-headedness and foresight to see what you are getting into, and to get the rewards without the obvious setbacks of debt? We sure hope so, because if not, payday advance loans may not be far behind.

This entry was posted on Tuesday, July 11th, 2006 at 9:49 am and is filed under Consumer Debt.