Credit card companies commonly offer cash rewards and other prizes to encourage the use of their cards.

Now, the Principal Financial Group of Des Moines, Iowa has begun offering mutual fund shares to entice investors to use its credit card available through Principal Bank, Principal's Internet bank. The bank introduced its own Visa credit card the last week of July.

The card promises customers that a percentage of their spending, between 0.75 and 1.2 percent of it, will be returned to them as so-called "cash rewards" which can be applied to a number of Principal financial products, including Principal mutual funds and variable annuities. The cash rewards can also be applied to a Principal Bank deposit account or loan payment.

Many credit cards offer cash rewards that can be applied to any number of products, including airlines tickets, gas and clothing. But, those programs, while popular, do not provide comparable benefits to the sponsor bank that Principal's program does, according to Steven Ollenburg, president of Principal Bank. Principal's program, which he said is a first, keeps assets within the corporate family.

"It's a marvelous way for the consuming public to expand their relationship with Principal," Ollenburg said. It is also cheaper than running an awards program with an outside corporation, an arrangement which can be inefficient, he said.

Brokers selling Principal mutual funds and variable annuities will not market the credit cards and Principal's mutual fund rewards program to their clients. Marketing will be confined to direct mail campaigns to selected groups of Principal's 10 million customers. Telephone representatives are also offering the cards in incoming calls from customers.

Principal Bank opened in April, 1998 as a "virtual bank" and now has 7,000 clients with about $65 million in assets. After a month of sales, there are already 3,000 credit card holders, according to Ollenburg.

The cash rewards can only be applied to existing mutual fund or variable annuity accounts. Principal is promoting the cash reward program as a means of saving for retirement while using one's credit card.

The mutual fund industry has increasingly turned to credit card marketing tactics to sell its products. Warburg Pincus of New York offers money market fund investors bonus miles from Northwest Airlines. Strong Funds of Menomonee Falls, Wis. offers gift certificates from and The Sharper Image to those who use netDirect, its online account access service.

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