How To Not Suck… At Understanding Credit Card Rewards

(photo: frankieleon)

(photo: frankieleon)

From rewards points to airline miles to cash back, there are many, many ways to earn so-called rewards by using a credit card. But rewards programs are often confusing and are sometimes limited by byzantine rules that can make them worthless or cause points to vanish into thin air.

FULL CONFESSION
What a credit card rewards fool I have been… Frankly, I sucked.

I have several credit cards. Over the years, some have changed hands from bank to bank. And most have changed their rewards program one way or another.

While researching this story, I decided I should check in on my own rewards — something I admit I haven’t done in years.

After about an hour on the phone with ridiculously peppy customer service reps, I had redeemed enough points to give me more than $1,800 of credits on my credit card statements, and I arranged for another $75 of gift cards to be delivered to my home. I also got a bonus of five times the points on new purchases between now and the end of the year on one of my cards (I didn’t even have to ask), plus two 0% balance transfer offers that I’m not planning to take.

Why did I suck? I also learned I had let enough points expire that could have meant another $1,500 in cash or account credits.

Yeah, I sucked.

So do as I say, not as I do (Or, did. You know I’ll be checking on my rewards programs more diligently from now on).

Here’s what you need to know to make the most of credit card rewards programs.

THE COST

The first issue to consider with rewards cards is the actual cost to you.

While some cards have no annual fee and reasonable interest rates, studies have shown that many rewards cards charge annual fees and have interest rates that are higher than average.

If you tend to keep a balance on your cards, a higher interest rate will cost you over time. Whatever rewards you redeem may not be worth the extra interest you’re paying, or the annual fee, if there is one.

To help do the math, sites like CreditCardTuneUp.com and NextAdvisor.com offer tools that can help.

Some cards have limits, such as only earning points up to a certain amount of spending. Maybe you get great rewards for your first $2,500 spent, but after that you get nothing, or very little.

Conversely, some credit cards’ rewards don’t really kick in until after you’ve spent a certain amount of money — offering you an initial cash back reward but not until after you’ve spent a certain amount. The goal is obviously to entice you to put as much money on your card as possible, making it more than likely that you’ll need to spread out the payments over months, effectively negating any rewards.

You should also pay close attention to the expiration of points or other rewards you may accumulate for spending. If you miss an important deadline (um, like I did) you could lose benefits that otherwise would have mean some greenbacks.

WHAT ARE YOU GETTING?

Call each of your current cards to see exactly what rewards you’re offered and how to redeem them. Make sure the plastic you have supports your needs and interests, before it’s too late.

Here’s some of what you will find:

Earn points: Many cards allow you to accumulate points based on your card usage, and these points can be redeemed for products, gift cards, or even balance credits, depending on the card. Read carefully what you can use your points for, and how many points you get for purchases. Some cards offer, across the board, one point for every $1 spent, while others offer higher points for certain purchases, such as three points for every dollar spent on gasoline or two points for every dollar spent on dining. Match your cards to your spending habits.

Cash back: Some lenders offer cash back, rather than points, based on how much you spend with your card. Understand the benefits for different kinds of purchases and what you can use the cash for.

Earn rebates or discounts: Some cards will give you a rebate, or money back, for purchases at specific retailers. Others give you the equivalent of a coupon for a percentage off of your buys at certain retailers.

Travel: If you’re a frequent traveler, you can find rewards that translate into free or discounted airline tickets, rental cars and hotel stays. Watch out for blackout times, though, which won’t allow you to use rewards to book travel at certain times.

If your card offers rewards for items you’ll never or rarely use, consider sticking it in the back of your wallet in favor of a different card.

MORE FINE PRINT
Let’s face it. Credit card companies are trying to make money. They’re not trying to give you rewards, unless, in their minds, they’re enticing you to spend more, keep balances, pay interest.

As such, rewards are not always as simple as they appear to be.

Some are not available right away, and you may have to wait before your purchases translate into points or future discounts. Most have expiration dates (as I was painfully reminded) so it’s important to understand how quickly you need to use what rewards you earn.

Some cards also penalize your rewards accumulation if you are late on a payment. Your point value could be removed entirely, or you may not be able to accumulate future points. Others may charge a fee to reinstate points that were eliminated from your account because of a late payment.

RESEARCHING CARDS
Because we all have different spending patterns and money needs, it’s hard to say one card is better than another.

There are many resources where you can compare card offerings and find those that meet your needs.

Here are just some of the sites you can use to compare rewards cards and their costs and benefits:
BankRate.com
CardWeb.com
Credit.com
CreditCards.com
LowCards.com

BEFORE YOU DUMP
If you decide to dump some of your cards because the rewards aren’t worth it, take a moment to think about what it may mean for your credit score.

There are two issues to consider.

First, think twice before cancelling your oldest card. Your length of credit history is one of many moving parts of your credit score, though FICO recently said it’s not an important part of your score.

And second, removing a card from your collection could have a negative impact on another part of your score, known as your credit utilization ratio. This looks at how much of your available credit you’re using, and is expressed in a percentage. If you have $10,000 of available credit and you use $2,500, you have a 25% ratio — pretty good. If you then cancel a card with a $5,000 balance limit, you lower your overall available credit to $5,000. That would make your credit utilization ratio 50% — not so good.

If you’re not planning to make any major purchases, such as a home or a car, the dings caused by card cancellations won’t really matter long-term. If you continue to pay on time and keep your balances relatively low, cancelling unneeded cards may be worth the temporary change to your score.

Have a topic you’d like to see covered in How To Not Suck? Or maybe you’re an expert who would like to share your insight with Consumerist readers? Send us a note at notsuck@consumerist.com.

You can read Karin Price Mueller’s stories for The Star-Ledger at NJ.com, follow her on Facebook, and on Twitter @kpmueller.

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