Despite the benefits of doing so, paying your credit card bill on time and paying more than the minimum can rarely be described as fun.
But what if there was a small reward for doing so? If you prefer a carrot over a stick, credit cards that reward you for good credit management behavior may be an effective way to overhaul your credit habits.
This, at least, is the theory behind a breed of credit cards that tie rewards earnings to credit card payment practices. Until recently, this type of card has mainly targeted college students and new credit users. However, a new card from Bank of America extends this unique approach to rewards earnings to consumers in general.
How the cards work
Here's a look at a few cards on the market that reward users for good behavior.
1. BankAmericard Better Balance Rewards card: Cardholders can earn up to $100 a year (awarded in increments of $25 a quarter) for paying on time and paying more than the minimum. Bank of America customers with a checking or savings account can earn an extra $5 a quarter for a total of $120 a year.
Rewards are not tied to the amount charged to the credit card. While the card has to be used each month to qualify, there is no minimum required purchase, so for savvy card users, the rewards earnings could turn into decent cash-back earnings. With an average of $83 in monthly spending, for example, rewards earnings would be the equivalent of 10 percent cash back — not bad for simply using your credit card. But spend $830 a month, and the cash back earnings drop to a standard 1 percent; at any amount above that, rewards earnings fall below average earnings on cash-back credit cards.
The card has an APR of 11.99 percent to 21.99 percent (depending on the applicant's credit) and no annual fee.
2. Capital One Journey Student Rewards Card: For students only, this card isn't quite as generous with bonuses as the BankAmericard is — although rewards are tied to the amount spent. For cardholders who pay on time, the card boosts cash-back earnings on the card from 1 percent to 1.25 percent for the amount spent in that month. That might sound impressive, but for a spend of $1,000, that gets you only an extra $2.50.
The card has a variable APR of 19.8 percent and no annual fee.
3. Citi Forward card: This card is also a student-only card and features a variety of small rewards for good credit behavior. The card gives cardholders a bonus of 100 ThankYou Points each month they pay their bill on time and stay under the credit limit, the equivalent of $1 cash back per month. Cardholders also get a 0.25 percent reduction on the purchase APR when they stay under their limit and pay on time for three payment periods in a row (up to a maximum 2 percent APR reduction).
The card offers seven months interest free on purchases, after which the APR will be between 13.99 percent and 23.90 percent, based on credit worthiness. There is no annual fee.
4. Discover Motiva: The Discover Motiva card takes some of the pain out of carrying a balance by refunding some interest charges to cardholders who pay on time. For each on-time payment, the cardholder gets a 5 percent of the interest costs refunded as a cash-back bonus.
The Discover Motiva has a 14-month interest-free introductory period for purchases, after which the APR will be between 10.99 and 22.99, depending on creditworthiness. There is no annual fee.
Do these cards pay off?
While the extra incentive to pay on time is great for people just starting out building credit, it shouldn't be the only criteria used when selecting a credit card — especially your first one, says Melinda Opperman, a senior vice president at nonprofit consumer credit management organization Springboard.
“It is important to make comparisons between the various cards available and read the fine print,” Opperman says. “We typically advise people to keep their oldest credit card account open for the sake of their credit score, even if they go on to get better credit card products down the line. That makes the choice of your initial credit card very important.”
Reading up on credit card terms and understanding the basics of grace period, interest rates and late fees can save new card users far more money in the long run than simple cash rewards, Opperman notes.
Plus, although the cards reward consumers for paying on time and paying more than the minimum, that's only part of the overall credit-building picture. The key to good credit, says Opperman, is not just paying bills in time, but having sufficient restraint when using credit, so you don't end up with balances you can't pay off. You might be able to pay off a bit more than your minimum on time each month and rack up the small rewards the card offers — but if you're carrying a balance, interest costs will promptly eat up the cash you earn.
“People who don't pay off their balances every month shouldn't let offers of cash rewards or points entice them to sign up for any new credit card,” Opperman says. “It's important to first learn to recognize the difference between needs versus wants, and to buy only what you've budgeted for.”