Don't charge away your benefits.

When labeler Shine finished graduate school in 2002, she was so fed up with credit card debt that she used part of her signing bonus from her new job to pay off all her cards. Then she did the unthinkable--she cut them all up! Shine, a 33-year-old senior engineer at PepsiCola, went without credit cards for more than a year before deciding to reactivate one to use in case of an emergency.

"I saw this commercial about a year ago and it talked about how [credit card] purchases could earn points toward college," Shine recalls. "I have two goddaughters, and I thought this credit card was a good idea." Shine signed up for the Citi Upromise Card, reasoning that she'd be getting something back for spending on card and it was for a good cause.

Shine, like many other consumers, wants to receive additional benefits for using a credit card. The increased consumer demand along with a highly competitive marketplace has resulted in a boom in reward programs linked to credit cards (also known as coalition or loyalty programs). In fact, in 2004, the number of card offers with a reward component surpassed those without, according to market research firm Mintel's Comperemedia. But more of these reward cards are transforming the phrase "spend to earn" into "spend to save" as they offer rebates that go directly into an investment vehicle such as a college savings plan or retirement plan.

The pioneers of this trend were Stockback, launched in June 2000, and Upromise, launched in April 2001. Newer entrants offer a variety of shopping partners, rebate percentages, and added incentives (see sidebar).

"It's a new generation in that these are the first loyalty programs that offer consumers a chance to earn something for more than their immediate benefit," says Rick Ferguson, editorial director of The Colloquy Group, which covers the loyalty marketing industry. "They're trying to appeal more to your sense of community and your sense of family."

If you're considering one of these loyalty programs with an investment spin, here's what you need to know.

HOW IT WORKS

Coalition programs help build the relationship between consumer and merchant. While none of the programs limit rewards to a specific credit card--in fact, you can sign up for some of these reward programs without using a credit card at all--many offer branded credit cards that feature increased rebate percentages. Another way to maximize rebate options is by shopping with the program's network of partners. The BabyMint college savings credit card, for example, offers a 1% rebate on every purchase but up to an additional 7% on purchases made with in-store partners. For Shine, the network of partners connected with Upromise was a key selling point. She saw it as an easy way to earn points.

IS IT REALLY SPEND AND SAVE?

These loyalty programs take advantage of microinvesting: investing small amounts over a long period. So while you're spending, theoretically you're also saving in the process. But the reality is such programs offer only a small boost to your savings. For instance, the Citi Upromise card caps rebates at $300 per year. And with the minimum 2% rebate on purchases made through Stockback $20,000 in charges generates only $400. But to fully reap those benefits, you'll have to pay your balance in full each month.

Bill Koleszar, chief marketing officer of Vesdia, which runs Stockback, BabyMint, and other programs, says, "The thing that we try to impart to our members is that this isn't the silver bullet of financial saving and investing. You can't expect or hope that our programs are going to get you all the way there, because they will not. They can help in a meaningful way, but you need to do more."

In addition, consumers must be involved with the programs over the long haul to reap any significant benefits. They don't work like airline miles, gift certificates, and a host of other benefits that can be redeemed within a few short months. "It's just earn, earn, earn and then hopefully, in 10 years, you've got a nice chunk of money that you can put toward your child's college education," says Ferguson. "It requires a sustained commitment on the part of the consumer to derive the benefits from the program. Whether they'll do that, it's probably too early to say."

THE CARD GAME HAS PITFALLS

Even if a consumer is committed to a program for an extended period of time, there is no guarantee the card companies will have the same commitment. Robert McKinley, CEO of Cardweb.com, points out that credit card companies reserve the right to change or end these programs at any time. "Anything could change--the grace period, the annual fee, or the 1% rebate could become a 1/2% rebate. And in this area there is less consumer protection because [the banks] tell you the program rules are subject to change."

While the savings aspect sounds attractive, the flipside is that you're racking up credit card debt in the process. In reality, you may be spending money that you could have saved from the outset. Stephen Brobeck, executive director of Consumer Federation of America, warns that the savings incentive should not affect credit card behavior: "These programs should not encourage credit card holders to borrow more money. If it does, the costs far exceed the benefits."

Shine found that the lure of rebates did in fact change how she used her credit card. She planned on using it solely for emergencies, but in her desire to earn points, Shine charged and charged. "If I saw the Upromise symbol, I would pay with the Upromise card instead of cash, so I started spending more on the card than I anticipated."

It wasn't long before she accumulated debt on the card. Then she missed a payment. While the amount of her rebate did not change, her interest rate shot up to 15.99%. After a year in the program, Shine saved $52 toward her goddaughters' college fund but spent $207 in interest payments. Shine's experience illustrates that it is essential for consumers who enroll in these reward programs to continue to show discipline in their spending habits.

Brian Anderson, CEO of BondRewards, which allows account holders to earn free U.S. savings bonds for purchases made with 150 partners, defends these investment reward programs as "a very simple, painless way to go about building an equitable savings strategy that can augment or enhance [consumer] savings by doing what they do every day."

And that is true for those who use the programs wisely. Shine admits that when she received the Upromise card, she was more focused on accumulating points than managing her debt. In an effort to be more disciplined, she has now cancelled the card and is aggressively paying off her remaining balance. "I think other investment options I have set up for my goddaughters are better vehicles for college savings," she says.

Finally, with so many reward program cards available, it is essential that consumers evaluate their goals, spending habits, and, most importantly, the card's interest rate before moving forward. "If you carry a balance, look at the reward and the interest rate and weigh it out. If one card offers a 13% APR and another offers a 15% APR and you carry a $5,000 balance, you are paying an extra $100 a year for the card with the higher interest rate," McKinley says. "Ask yourself, is the reward worth it? Make sure you are not overpaying on one feature of the card to get another feature."

So before you are swayed by the promise of saving for a college education or some other investment goal by spending on your credit card, remember that those who reap the highest benefit are those who pay on time and don't overspend.

Reward Cards With Investment Features

The majority of coalition programs are geared toward education savings,
but just about every investment vehicle is available. Here's a snapshot
of their offerings:

                                      COLLEGE SAVINGS PLANS

Citi Upromise              No annual fee; variable APR of 11.49%; earn
Platinum Select            1% on all purchases, up to $300 annually.
MasterCard                 Earn up to 10% on grocery and drugstore
                           purchases and gasoline. www.upromise.com
Fidelity Investments 529   No annual fee; variable APR of 13.99%; earn
College Rewards Card       2% on eligible purchases, sent directly to
                           Fidelity-managed 529 savings plan, with a
                           maximum $1,500 contribution per year.
                           http://personal.fidelity.com/products/
                           checking/
BabyMint MBNA Platinum     No annual fee; APR of 9.9%; earn 1% on all
Plus MasterCard            purchases and up to an additional 30%
                           through participating merchants. Earn
                           matching tuition dollars from nearly 150
                           private colleges. www.babymint.com
Futuretrust MasterCard     No annual fee; 0% introductory APR on
                           purchases for the first six months; earn 1%
                           on all purchases and up to 10% through more
                           than 200 partners. www.myfuturetrust.com
EdExpress                  Earn rebates of up to 35% with 400 online
                           retailers for an annual membership fee of
                           $24.95. www.edexpress.com

                                   RETIREMENT AND SAVINGS PLANS

NestEggz Loyalty           No annual fee; 9.9% APR; earn a 1% rebate on
Rewards MBNA               all purchases, 3% on gas, and up to 30%
MasterCard                 through retail partners. www.nesteggz.com
Stockback MBNA             No annual fee; 9.9% APR; earn up to 2% on
Platinum Plus Visa         all purchases and up to an additional 30%
                           through participating merchants.
                           www.stockback.com
BondRewards                No membership fee; earn rebates from 150
                           online partners (most offer between 2% and
                           10% back). Get a free U.S. savings bond with
                           50 BondDollars. www.bondrewards.com

--Erin Straker