A Bonus for Blowing Off Your Bills --- Credit Cards Offer Rewards For Carrying a Balance; 5% Back vs. 13% Interest By Ron Lieber 16 September 2003 The Wall Street Journal (Copyright (c) 2003, Dow Jones & Company, Inc.) "HEY -- WE know you're not dumb," says the come-on from Citigroup. "You can tell a good deal when you see one." Then comes an offer of questionable generosity: Up to 3% cash back on all credit-card purchases -- but only during months when you don't pay off your monthly balance. Just when you thought you'd seen everything from the credit-card industry, now come cards that reward customers for not paying their bills. The conventional wisdom is that it rarely makes sense to carry a balance on a credit card. But, in fact, 61% of Americans do. That accounts for the bulk of credit-card company revenues, making it only a matter of time before the industry's rewards-and-miles obsession came rolling their way. The cash-back card from Citigroup Inc.'s Citibank unit is just one of a growing number of such offers. Bank of America Corp.'s "Money Return" card simply refunds a tenth of the interest you pay each year. Providian Financial Corp. is currently testing a new program that gives extra reward points to people who carry a balance. The more money you borrow through your charging, the more points you get. Tally up 20,000, and you get a $500 airline ticket. Of course, these new cards don't change the basic facts of life for customers: You still have to make your minimum monthly payment. The flurry of rewards-for-balances offers is likely to send some thrifty consumers scurrying to their calculators to reconsider their habits. American Express Co., for example, has an offer on its Blue Card that gives higher cash-back rewards for customers who spend heavily at home-improvement stores, grocers and gas stations. Hit those stores -- and carry a balance -- and you can end up with 5% cash back on some charges. Customers who don't carry balances on the Amex card still earn refunds, but theirs aren't as high. American Express is getting ready to launch a big marketing campaign for the cash-back version of its Blue Card that is likely to include television commercials and Internet ads. Do the extra rewards from these rewards-for-debts credit cards compensate consumers for the interest costs associated with carrying a balance? Almost never, since the interest charges range from 8.99% to 16.99%. Eiji Hirai, a software engineer in San Mateo, Calif., who earned almost $600 in refunds on his American Express card last year without carrying a balance, has explored the rewards system of the Amex card and concluded it's not economic to carry a balance in return for a higher rebate. American Express and the other companies offering these cards say they're trying to gain market share from competitors, not to convince people to carry a balance who wouldn't do so ordinarily. "That would be a waste of time and energy," says Larry Sharnak, senior vice president of consumer lending at American Express. "That wasn't even in the back of our minds." Still, some of the pitches are aimed at people who are just beginning to learn about credit and managing their own finances. The Citibank card is targeted specifically at students. It offers 3% cash back on all purchases but only during months when you don't pay off your entire bill. Write a check for the full amount each month, however, and there's no rebate at all. A Citibank spokeswoman notes that this is one of several different student cards and is designed to fill a niche for people who carry a balance and might want a reward for doing so. "Clearly, we would not want to encourage it, but if you're already revolving, this may be a product that works for you," she says. Banks also hope that the cards will make consumers think twice about transferring their balance to another card company. As interest rates plummeted last year, some card companies were waiving interest charges for new customers for as long as 15 months. Issuers have a better shot at keeping profitable, interest-paying cardholders if those customers are earning rewards toward a goal, such as a free plane ticket or a 5% rebate level. The new cards underscore how important customers who carry balances are to the card industry. Card companies that peddle plastic to customers with good credit will get $79.9 billion -- or two-thirds of their total revenue -- from interest charges this year, according to R.K. Hammer, a bank-card advisory firm. The 51 million households that carry balances on their cards have an average balance of $11,944, according to Cardweb.com, an industry information site. With the average credit-card interest rate currently running at about 13%, according to Bankrate.com, that means that each of those families is paying the card companies an average of over $1,500 in interest annually. Still, some loyalty experts see tying rewards to indebtedness as a questionable approach. "You're paying consumers to pay you," says Chris Moloney, director of market strategy for Maritz Loyalty Marketing in Fenton, Mo. Mr. Moloney says he recently talked a bank out of rewarding customers who bounce checks. While the cards may make sense for customers who routinely carry a balance anyway, the math in most cases certainly doesn't support taking out a larger balance. The Bank of America Money Return card, for instance, currently offers annual interest rates ranging from 11.99% to 16.99%, depending on how good your credit history is. So if you're carrying $12,000 of credit-card debt the entire year, you'll pay the bank at least $1,440 in interest. While the bank will give you a tenth of your interest back, or a minimum of $144, for carrying this balance, you could save a lot more by finding a credit card that simply offers a lower rate. Bank of America responds that its card "meets the needs of a niche market -- those individuals who carry a balance and desire cash back on their interest payments."