Credit card companies are great marketers. They focus on the “rewards” you will gain from using their card, entice you to give them loyalty, and encourage impulse buying. The question is: Do these reward programs really pay off, or does the “free money” come with strings attached that dissipate the value of the rewards?
Basic Rewards Programs: Cash Back and Points.
Cash back credit cards give you cash that will be used as a statement credit or a deposit into a designated account. Most programs offer between 1% and 5% cash back as a percentage of purchases.
Points or “Rewards Program” credit cards offer a number of percentages of points for every dollar spent. The higher the reward, the more stringent the rules will tend to be. Rotating categories are also common for bonus points. Points can be redeemed for travel, hotels, flights, gift cards or even merchandise, depending on the card and the program you have.
That seems straightforward enough: You spend money, gather points or cash value, and then redeem them for cash or rewards. But things may not be as simple as you think…
- Carry a Balance? If you carry a balance from month to month, your interest charges will always far exceed any reward program offered. Even a 5% cash back on all purchases cannot make up for the 22% interest being charged on the money you are financing. Carrying a balance from month to month negates any benefits found with rewards. In this case, forget about the rewards and focus on interest rate. The only rewards program that might create enough value to consider is one that accepts a low interest balance transfer to use towards the bonus threshold. Otherwise getting the lowest interest rate always trumps the best rewards programs available.
- Beware of expiration dates. Most rewards cards have expirations between three and five years. Cashing in points or cash annually will prevent points from expiring.
- Pay attention to sign up bonuses. Often these come with spending thresholds that must be met in order to gain the reward. In order to get that free hotel room or free flight you must spend a certain amount in the first three months. Don’t overspend or buy things you do not need just to get the bonus. That can FEEL advantageous at times but it can trap you into adding more debt. Plan ahead and charge utilities or other monthly bills with the credit card in order to meet the threshold requirements and then pay the credit card bill in full when it comes due. Balance transfers will sometimes count towards spending thresholds, which might allow you to lower your rate on existing balances and get the bonus.
- Do you need to register? Accounts with revolving rewards may require registration to qualify for the bonus points. You might need to claim bonus rewards or complete an online task to qualify. This is free, but you need to stay on top of requirements found in the fine print. And, your name may be sold to similar partners in which to market to you.
- Delinquencies can cancel rewards you have accumulated.
Rewards programs have different rules and requirements you must follow. Knowing the fine print and ensuring you follow the rules will help you maximize benefits. Cards also attribute different point values and offer different redemption rates making it difficult to perform apples to apples comparisons on which card offers the most rewards at the lowest price.