Editorial Policy

Not All Rewards Cards Have Annual Fees

Erica Sandberg

April 3, 2012

QDear Erica,

Is there such a thing as a credit card with no fees that still offers perks like cash back or travel rewards? If there is, how can the credit card companies make money this way? I would like to have one of these cards if they exist, so can you please tell me how I can get one?  — Beth

ADear Beth,

There are a few cards out there that offer the attractive benefits you describe with no annual fee. The Capital One VentureOne card is one example. The Chase Sapphire is another.

It does seem odd that a credit card issuer would give someone a “free” card and then pay the cardholder in the form of perks, doesn’t it? However, there are other ways that issuing banks make money besides assessing annual fees and late and over-limit penalties.Ask Erica

A major source of revenue is the interest an issuer charges on any balance that the cardholder does not pay in full by the due date. That interest rate will be lower on premium cards (cards for people with good credit) than on subprime cards (cards for people with bad credit). Yet even issuers of top-tier cards tack on finance charges to rolled-over debt. Many people (even those with amazing credit) don’t pay their balances in full every single month, and that adds up to big bucks for the company.

So what if you have one of those awesome no-fee, low-interest rate cards, but pay every penny you’ve charged as soon as the bill comes in? Well, the issuing bank still earns money. They usually get a few percentage points on each purchase the person makes with that card in the form of swipe fees. When the cardholder spends, they profit.

That’s the basics of a credit card issuer’s business model, and a lucrative one it is. But as you rightly pointed out, it can also be financially advantageous for you. Because, with their profits, the issuers can afford to give back to their customers in the form of rewards.

To qualify for the very best cards, your credit history and scores needs to be excellent. The easiest way to gauge your rating would be to pull your FICO score (available for around $20 at MyFICO.com). These scores range from a low of 300 to a high of 850. Right now, the top cards demand a score in the mid-700s. To achieve these numbers, you’ll have to use credit very well for a number of years. Here’s how:

1.  Charge regularly.

2.  Send payments on time.

3.  Pay balances in full.

4.  Never let other bills, such as medical or utility bills, go into collection.

5.  Have and use a variety of credit types, including credit cards, charge cards and installment loans.

6.  Keep credit applications to a minimum.

7.  Avoid getting sued for debts like back rent or other obligations.

8.  Keep your state and federal income taxes current.

9.  If you owe student loans, make sure the balances are steadily declining.

10. If you pay child or spousal support, stay on top of payments, and never end up with in arrears.

If you can manage all that, you’ll build a score that issuers will adore. But wait! That isn’t the end of the story. You’ll also have to have a steady job, because the bank will want to know that you can afford to make the payments when you do begin to charge.

Assuming you have all this covered, you should be able to qualify for a credit card with terrific terms and a rewards program that allows you to earn points redeemable for airline miles, cash or gift cards. Start small, and work your way up to one of these accounts that let you earn while you shop.