Credit card rewards programs vary

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DEAR SUN SPOTS: This may not be something you can answer. Who actually pays the cost of rebates, frequent flier miles, discounts, etc., given by credit card companies and airlines?

For example, with the 1 or 5 percent cash back offered by Discover Card. Does the store where you made the purchase get charged that money by receiving less for your purchase or does Discover Card pay it? If the store is paying that money, does that mean that the store is actually charging cash payers more for that item?

The same applies to the airlines. My son flies frequently for work so accumulates free trips. Who is actually paying for that seat as he is not nor is a paying customer?

Just wondering how this all works. Thanks. I enjoy your column. — Edie via email

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ANSWER: As the writer notes, this is not readily available information. Some corporations would really prefer that consumers not know too much about how the deals are structured, plus cards vary depending on the agreements between the corporations.

The costs for credit cards begin with your purchases. Every time you use a credit card, the merchant pays a fee to Visa, MasterCard, Discover or American Express. Those fees differ, with American Express the most expensive (one website said about 4 to 5 percent of the purchase price), then Discover, with MasterCard and Visa the least expensive, say 1.5 to 2 percent.

However, the volume for Visa and MasterCard are much greater than for the other two. Large merchants — think Walmart — might be able to negotiate a better deal.

Also, with some cards you pay an annual fee to the issuing bank or company, but with others you do not. (Unless you have poor credit and no other choice, Sun Spots recommends avoiding paying annual fees.)

As for rewards, many credit cards now offer either merchandise or miles per dollar spent, but Sun Spots is most knowledgeable about Discover, which offers fairly generous cash back bonuses, sometimes as much as 5 percent for purchases in certain categories (this quarter it’s restaurants or movies) or with certain merchants through Discover’s online shopping mall.

Once you have earned your cash back bonus dollars, you have additional opportunities to maximize your rewards. For example, if you have earned $20 in reward dollars with Discover, you have several options.

* You can get cash or apply that $20 to your bill (Discover eats that cost)

* You can get a partner gift card. That’s where the merchants’ options come in. For example, Ace Hardware gives you a $50 card for $40 in bonus dollars, while a $50 card for CVS or Olive Garden requires $45 in bonus dollars. This indicates to Sun Spots that Ace is chipping in the $10 toward that gift card, while CVS and the Olive Garden are forking over $5. But she hasn’t been able to verify that.

* In some states, you can get a general-use Discover gift card, but they are not allowed in Maine.

* You can also buy merchandise directly with your bonus dollars, say a video camera or watch. Sun Spots, who makes good use of her Discover dollars, has never utilized that option. She worries about a couple of things, such as overpaying and obtaining warranty service, but she has no evidence that either is a valid concern.

* You can also donate your bonus dollars to charity.

As for frequent flier credit cards, they are often airline specific. If you fly Southwest Airlines, for example, you can get a credit card that earns a certain number of miles on Southwest per dollars spent using that credit card. In these cases, the issuing bank and airline would work out the details of their deal.

Sun Spots has looked into several cards for Mr. Sun Spots, but all of those she found had an annual fee, which she refuses to pay.

Some cards, such as Capitol One, offer miles on more than one airline. Sun Spots found a post on quora.com that said the banks usually pay the airlines a penny or two for each mile offered. Again, she has no official source. 

As for miles earned by flying, the airlines eat that expense, although many try to minimize this cost to their bottom line by limiting the number of available frequent flier seats on the most expensive routes or on the heaviest travel days of the year. A seat on Christmas Eve to just about anywhere is much more valuable to an airline than one to Florida in July.

This column is for you, our readers. It is for your questions and comments. There are only two rules: You must write to the column and sign your name (we won’t use it if you ask us not to). Please include your phone number. Letters will not be returned or answered by mail, and telephone calls will not be accepted. Your letters will appear as quickly as space allows. Address them to Sun Spots, P.O. Box 4400, Lewiston, ME 04243-4400. Inquiries can also be emailed to sunspots@sunjournal.com.

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