Don’t Charge Away Your Benefits

When Tabeier Shine finished graduate school in 2002, she was so fed up with credit card debt that she used part of her signing bonus from her new job to pay off all her cards. Then she did the unthinkable–she cut them all up! Shine, a 33-year-old senior engineer at Pepsi-Cola, went without credit cards for more than a year before deciding to reactivate one to use in case of an emergency.

“I saw this commercial about a year ago and it talked about how [credit card] purchases could earn points toward college,” Shine recalls. “I have two goddaughters, and I thought this credit card was a good idea.” Shine signed up for the Citi Upromise Card, reasoning that she’d be getting something back for spending on the card and it was for a good cause.

Shine, like many other consumers, wants to receive additional benefits for using a credit card. The increased consumer demand along with a highly competitive marketplace has resulted in a boom in reward programs linked to credit cards (also known as coalition or loyalty programs). In fact, in 2004, the number of card offers with a reward component surpassed those without, according to market research firm Mintel’s Comperemedia. But more of these reward cards are transforming the phrase “spend to earn” into “spend to save” as they offer rebates that go directly into an investment vehicle such as a college savings plan or retirement plan.

The pioneers of this trend were Stockback, launched in June 2000, and Upromise, launched in April 2001. Newer entrants offer a variety of shopping partners, rebate percentages, and added incentives (see sidebar).

“It’s a new generation in that these are the first loyalty programs that offer consumers a chance to earn something for more than their immediate benefit,” says Rick Ferguson, editorial director of The Colloquy Group, which covers the loyalty marketing industry. “They’re trying to appeal more to your sense of community and your sense of family.”

If you’re considering one of these loyalty programs with an investment spin, here’s what you need to know.

Coalition programs help build the relationship between consumer and merchant. While none of the programs limit rewards to a specific credit card–in fact, you can sign up for some of these reward programs without using a credit card at all–many offer branded credit cards that feature increased rebate percentages. Another way to maximize rebate options is by shopping with the program’s network of partners. The

BabyMint college savings credit card, for example, offers a 1% rebate on every purchase but up to an additional 7% on purchases made with in-store partners. For Shine, the network of partners connected with Upromise was a key selling point. She saw it as an easy way to earn points.

These loyalty programs take advantage of microinvesting: investing small amounts over a long period. So while you’re spending, theoretically you’re also saving in the process. But the reality is such programs offer only a small boost to your savings.