Fancy credit-card lures often mask high rates and annual fees


NEW YORK -- What do you want from your credit card? Perks and rebates on purchases or a low transaction cost? Many credit-card users will have to choose one or the other. It takes a careful shopper to get both at once.

If perks attract you, like a moth to a flame, you have more to choose from every day. They're offered by the "co-branded" cards, which are sponsored jointly by a company and a bank. The company lures you with discounts or rebates for using the card; the bank hopes you'll run up sizable bills and have to pay interest on the balance.

Depending on which bank card you use, you can get frequent-flier miles on American Airlines, a discount on an Apple computer, rebates on Shell gasoline and General Motors cars, free phone calls from AT&T;, a savings account at Fidelity or cash back from General Electric. Some 800 other cards offer similar enticements, and more get into the game each month. A card is being tested that rewards health-club members who work out at Bally's.

Bottom line, are these cards a good buy? That depends on how you use them. Here are the questions to ask:

* 1. What's the interest rate on unpaid balances? Most of the co-branders peg their rates high, at the prime rate plus 9 to 10 percentage points. With the prime at 7.25 percent, that's 16.25 to 17.25.

Robert McKinley, president of RAM Research in Frederick, Md., which tracks credit-card pricing, thinks you shouldn't pay more than prime plus 5 percentage points, for a top of 12.25 percent. But co-branded cards "don't have to be the most competitive in the marketplace," a MasterCard vice president, Stephen Bartell, told my associate, Amy Eskind. Customers are choosing the rebate over low card costs.

You can have your cake and eat it too if you pay all your bills within a specified grace period, during which no interest is charged. That gives you the rebate at no extra cost.

* 2. What's the annual fee? Some cards charge $20 to $50 a year, others charge nothing.

* 3. How good is the offer? Don't be blinded by a big rebate if you won't charge enough on the card to earn it.

Take the Apple Citibank MasterCard or Visa. Card users earn annual rebates of up to $500 on Apple products. The rebates are figured at 2.5 percent of your purchases up to $3,000 and 5 percent thereafter. So to earn your full $500, you'd have to charge $11,500 to the card.

The average credit-card holder puts $2,500 on his card each year, so his rebate would come to just $62.50. That won't buy a big byte out of an Apple.

And take the Ford Citibank Mastercard or Visa. You earn rebates of up to $700 a year (to a maximum of $3,500 over five years) toward the purchase of a Ford vehicle. But to get the full $700 in any year, you have to charge $14,000 to your card.

Reaching for rebates might also blind you to cheaper purchases somewhere else. If you hold a Shell MasterCard from Chemical Bank, for example, you get 2 percent rebates on all purchases you charge plus an extra 1 percent on Shell gasoline. (Once your rebates reach $70 in a year, only the Shell rebate will be granted.) But the average person spends $700 annually for gas. That garners just $21 in rebates.

You might save more than $21 a year at a station that undersells Shell.

Some cards take back with one hand what they give with another. The Fidelity Investors Card, for example, gives you a 1 percent rebate on purchases, with a cap on the rebates of $100 a year. That money goes into a savings account. But for this small sum, you have to keep an unpaid balance on your card of at least $500. Otherwise, you'll be assessed $2 a month. If you charge the average $2,500 a year and always pay in full, you'll earn $25 in rebates and pay $24 in fees. If you keep the $500 in unpaid balances, you'll pay at least $80 in interest in current rates.

The average card user can often do better with a cheap, plain-vanilla card like Atlanta-based Wachovia Bank's First Year Prime card: annual fee, $18; charge on unpaid balances, prime rate the first year, then prime plus 3.9 percentage points, for a total today of 11.15 percent.

Consider a co-branded card only if you pay off your balances every month and charge enough money to your card to make the rebate worthwhile.

Jane Bryant Quinn is a syndicated author. Write her at: Newsweek, 444 Madison Ave., 18th Floor, New York, N.Y. 10022.

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