Everybody likes a freebie, so naturally, credit card rewards programs have attracted a wide following.
Of course, like the proverbial free lunch, these bennies do come at a cost. You have to spend money to collect rewards. You may have to pay a fee to use the card, and if you carry a balance, you have to pay interest.
So are the rewards worth going after? And if so, which awards are better — points, travel miles, or cash back? Before selecting your credit card, you’ll need to calculate the costs versus the benefits, and that calculation depends on your unique combination of spending and paying habits.
These six considerations should guide you in your choice of credit card reward plan:
1. The biggie: cash equivalent redemption value
All points, miles, and cash are NOT created equal, but if you read through the card issuer’s terms, you can determine the cash equivalent value of points and miles. For example, miles are almost never literally redeemable for an exact number of miles of air travel; they can be converted to a credit for the purchase of air travel. The term “miles” is really just another word for points. You could say hamburgers or bananas if you prefer (or if you’re very hungry).
Recently, US News & World Report stated that points are often — but not always — equal to one cent per dollar spent, which is also pretty standard for cash back programs. In the end, points, miles, and cash all represent spending power, and the terms for converting them tell you what the cash equivalent value is. Cash, of course, equals cash – so unless points and miles are convertible at a higher rate than you would earn as cash back, why would you choose a less flexible reward?
2. What floats your boat?
Assuming you like travel rewards, anyway. It makes little sense to earn rewards for things you don’t care about and can’t use, so make sure points or miles are redeemable for things you would want to purchase anyway. Also, whether you chase points, miles, or cash, if you spend more than you normally would just to earn rewards, then those rewards are costing rather than saving you money.
3. Speaking of costs….
Compare the annual fees / membership dues / whatever of rewards cards to those of their non-reward counterparts to see what the rewards program really costs. The rewards should exceed the added costs — obviously, if your spending patterns would get you rewards worth $50 in a year, $100 in additional fees is a deal killer. If you need help interpreting the jargon credit card companies use to describe their fees and other terms, check out these credit card contract definitions prepared by the nice folks at the Consumer Financial Protection Bureau.
4. Is the rate great?
In general, rewards cards carry interest rates several percentage points higher than cards designated “low interest” or “balance transfer.” If you plan to carry a balance, see what rate you qualify for with one of these cards, then compare it to the rewards card, and make sure the value of the rewards surpasses the added interest charges.
5. The BIG print given, and the small print taken away
When you add up the potential cash value of the rewards, be sure to consider any limits on the bonuses that can be earned or any restrictions on when and how they can be redeemed. Many cash back cards, for example, limit the cash you can earn in a given month, quarter, or year, no matter how much you spend. Other cards impose expiration dates on their rewards – use them or lose them!
6. How much work are you willing to do?
Finally, ask yourself this: are you the kind of person who catalogs and redeems every coupon you get, or do you have two-year-old unused gift cards in your wallet? If you’re a Type B flower child, a rewards card that requires you to keep up with changing categories of spending, track your points and deal with expiration dates for your redemption is unlikely to provide you with much joy.
On the other hand, if you get a thrill by chasing rewards with a higher cash-equivalent rate than a cash-back program, go for it — as long as you’d buy the things for which those points or miles can be redeemed anyway. Finally, keep a cool head — pick rewards programs with the lowest fees, and sidestep an interest rate premium by paying your balance in full each month.