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So far we’ve talked about what types of cards there are, how credit card companies make their money and how to reduce your payments. The next lesson in our Credit Card 101 rundown is to go over those incentive plans that often come with credit cards.

I admit that I sometimes choose a credit card based on the incentives, which probably isn’t the best reason.  But if I’m going to be spending the money anyway (we use our card for gas and groceries almost consistently), I figure we may as well use a card that offers something above and beyond what another card may (or may not) offer.  We have a MyPoints Visa card which earns me more points to redeem for gift cards.  Plus hubby’s Bank of America card that he’s had since he was 18 offers a points system, also, which we’ve redeemed in the past for gift cards to some of our favorite restaurants (Maggiano’s Little Italy and Macaroni Grill).

What’s the deal behind credit card incentive plans?

Let’s take a look at the frequent flier plans that come with some cards.  Say they offer a free domestic ticket after 20,000 miles.  That typically means you have to spend $20,000 on your card before you can redeem it for your free ticket.  When have you ever paid $20,000 for a plane ticket?!  Say it takes you 5 years to charge that much on your card…unless you pay your balance in full every month, you are probably paying a great deal in interest.  So really, that flight isn’t so free…  Not to mention that the frequent flier cards often charge a fee that is higher than a typical fee (and we already know that you shouldn’t have to pay for a fee because you can find a number of cards that don’t charge for membership).  Where a regular credit card does decide to charge an annual fee, it’s normally around $25-$50.  Those that are tied in with airline miles tend to charge upwards of $75-$100.  So over the 5 years it takes you to charge enough to earn a free domestic flight…you’ve probably paid enough just in the yearly fees to have purchased it on your own without the incentive plan.

When you have a frequent flier incentive card, you will also find that you lose the freedom to negotiate your rate.  With a typical card, it’s normally as easy as calling customer service and requesting a lower rate (which we talked about last time).  Try that with a frequent flier card.  Even if you’re nice, you will probably get turned down.  Even asking for them to waive your membership fee will get a simple “No” in most cases.  I’m not sure why, but they are less willing to work with you or negotiate to keep you, even if you are paying thousands of dollars a year in interest to them.

Also, beware of plans that expire your miles after a certain date.  Wouldn’t you hate to go through all the hassle and purchasing to get your miles, just to have them expire before you use them?

Incentive plans are designed to get you to spend more money, and nothing else.  When you spend more, they collect more interest, and they win in the long run.  A free coffee maker costs them a fraction of what you’re paying in interest over the course of the time it took you to earn it.

My advice is that if you’re going to spend the money anyway, then sure…spend it on an incentive card.  But pay it off before interest kicks in.  We charge gas and groceries on our points card every month because they are expenses we have built into the budget.  We get the free points, but we also pay off those charges in the same billing period without having to pay interest.

Just be smart with your incentive plans.  Don’t let them own you!