Two Cards Offer Rewards for Debtors, but Be Careful

Now some credit-card companies, including Discover and Bank of America, are trying to convince you otherwise, by launching credit cards that offer special cash-back rewards meant to appeal to those carrying a balance. The goal, they say, is to help folks manage their debt better.

"We found 85% of [consumers who carry a balance] prefer rewards for paying on time versus rewards on spending," says Margo Georgialis, chief marketing officer for Discover. "So we created a program that combined both. It wasn't just about rewards, but about a total experience of being on top of your credit."

Discover's Motiva card, launched this month, offers a twice-a-year cash-back bonus equal to your interest charges for one month, provided you make payments on time for six months in a row. Bank of America's Money Return Visa, on the other hand, gives revolvers a 10% rebate on the interest charges they've paid for the past year. Both cards feature low-rate promotional periods (3.9% until 2010 and 0% for six months, respectively) on balance transfers and no balance-transfer fees, making it easier for consumers to make a dent in their debt.

But do these new cards stand up to the no-frills low-rate cards or attractive 0% APR balance-transfer offers that revolvers typically favor? It all boils down to the math, says Scott Bilker, founder of DebtSmart.com.

With the help of Bilker's help, we ran debt payoff scenarios for the two new cards, comparing them with two "old-school" credit cards that also target revolvers, but by using low rates rather than special rewards. The Simmons First Visa Platinum card is currently the lowest-rate card out there, according to Cardratings.com, with a 7.25% fixed APR. And with a promotional offer of 0% APR for the life of the balance, as long as you make two purchases a month (use code F1K7), Citibank's Diamond Preferred Card is one of the best balance-transfer deals around, as long as you approach it smartly. (For details on each offer, see the table below.)

For each scenario, we assumed we'd open a new card and transfer a $5,000 balance. We'd also make $200 monthly payments until the balance was paid off. Except for the Citibank card, we would make no new purchases. (You can run your own scenarios using our Digging Out of Debt and Balance Transfer calculators.)

The results were mixed. The 0% APR for life from Citibank came out on top, assuming we made two $1.50 purchases for a total of $3 each month — think two cups of coffee or two packs of gum — to keep costs in check. But it's also the offer that requires the most vigilance. The 3.9% introductory APR on balance transfers through 2010 from the Discover Motiva card scored second. (It's worth noting, though, that in our scenario the $5,000 balance would be paid off before the 3.9% promotion expires. If you cannot pay off your debt within three years, you'll be hit with the card's regular APR, now 10.99% to 17.99%, which will increase your total interest charges.) In third place as the Simmons First card, and the Bank of America Money Return card came in last. Here are the details.

Needless to say, the offers above come with some notable loopholes. Here are three to watch for.