Years ago, credit card reward programs were simple: There weren’t any.
Then Discover came along with its cash-back offer, and airlines hooked up with banks to issue credit cards that earned frequent flier miles.
Today, consumers face a bewildering array of ways to earn, and spend, credit card rewards:
- A credit card can contribute to a retirement account, score theme-park tickets or knock thousands off the price of your next car.
- You can convert miles into hotel stays or restaurant meals -- or use them where you stay and eat to earn extra miles.
- Once you reach the stratosphere of spenders, you can use your rewards to design one-of-a-kind vacations and “experiences,” like a week at a French cooking school. All this choice leads to inevitable second-guessing. Sure, you’re getting rewards. But are you getting the most rewards possible? Do you have the best card, and are you taking the best advantage of it that you can?
Do You Carry a Balance?
The answer is simple if you’re the kind of credit card user who carries a balance. Reward cards are not for you.
Any benefit you get from a rebate card is swamped by the added interest costs when you carry a balance. Instead, you should look for the lowest-rate card you can find so you can pay off your debt as quickly as possible. Don’t get sucked in by 0% offers on rebate cards; after they expire, you’ll typically pay a much higher interest rate than you could find if you looked for a low-rate, non-rebate card.
For everyone else, though, there are no easy answers. The best reward card depends on a number of factors, from how much you charge to how much flexibility you want to how fast you can use your accumulated rewards.
It Takes Time and Effort
Anyone who wants to get the optimum deal must be willing to invest a little time -- not only in choosing a card but in managing it afterwards. Savvy rebate card users view their programs as a kind of investment, and know the payoff can vary with the amount of attention they give. They peruse statement stuffers or e-mail newsletters for tips on earning extra rewards, and focus their spending patterns to give them maximum rebate bang for their bucks.
Here are four ways to get started:
Know your currency. To compare deals, you should know how rewards are valued.
Frequent-flier miles are the gold standard of the rebate credit card game, and they’re typically valued at 1 or 2 cents apiece (although you can stretch their worth to 8 or 9 cents when used to win upgrades on a discount coach ticket, according to miles guru Randy Petersen, publisher of WebFlyer online newsletter). One or two cents is the equivalent of a 1% to 2% rebate when you're earning one mile per dollar spent.
Knowing a mile’s value helps in two ways. You wouldn’t want to stick with a program that offered you rewards of much less than 1%. You also wouldn’t want to squander any miles you earn for merchandise or other conversions that give you much less value for your money -- unless your reward is about to expire. (For a list and comparison table of airline mileage cards, see MSN Money's Credit Card Analyzer.)
Know your limits. Most airlines have moved away from automatically expiring miles, but some airline-affiliated credit cards have a “use it or lose it” policy, as do many “travel reward” plans not affiliated with a specific carrier. If it will take you a long time to earn or use your reward, you’ll want to make sure you can bank it. American Express and Diners Club, for example, have frequent-flier programs with miles that never expire. (Use the Credit Card analyzer to find and compare travel reward cards.)
Other types of rebate cards may limit how much of a reward you can earn a year.
The “car cards,” for example, tend to be the most generous reward cards in terms of what percentage rebate you earn -- but the reward has its limits. The GM Card lets you earn 5% toward the purchase or lease of one of its vehicles, but then curbs how much you’re allowed to apply to a given vehicle. Only $1,000 in rebate awards currently can be redeemed on a new Hummer or Corvette, for example, while $3,000 can be used to purchase a Silhouette minivan. (You can find and compare auto rewards cards using MSN Money's Credit Card Analyzer.)
The Subaru Platinum MasterCard from Chase, meanwhile, has a 3% rebate but limits your maximum reward to $500 a year. That means if you charge more than $16,667 a year, you won’t be earning any additional rebate.
Don’t want a GM or Subaru vehicle but still want bucks off on your next car? Another option is the Citi Driver’s Edge Platinum Select Card, which gives you a 1% rebate (up to $500 a year) toward the purchase or lease of any new or used car. You can charge up to $50,000 a year before hitting that cap.
If you want the discounts but charge more than these levels, you can switch to another card (with a separate rebate program) after you’ve earned the maximum reward.
Do the math
Match the card to your spending. Just as heavy credit-card users can run into limits on how much of a reward they can earn, light users can find themselves not earning enough rebates with their card to make the cost worthwhile.
If you charge just $5,000 a year on a card that costs $60 annually, for example, it will take you five years to earn a free airline ticket with most cards (assuming one dollar spent earns one mile, and a ticket costs 25,000 miles). In that time, you’ll have paid $300 in fees -- enough to buy a discount coast-to-coast ticket on your own.
Even some of the no-fee cash-back cards might not be the answer. Most don’t give a full 1% back until you reach certain spending levels. Discover, for example, gives just .25% cash back on your first $1,500 of charges and .5% on the next $1,500, reaching the vaunted 1% level only on purchases above $3,000 a year. So you’ll earn a whopping $7.50 on your first $3,000 in charges, then $10 on every $1,000 charged after that. The American Express Costco Cash Rebate Card requires $5,000 in spending before you reach the top 1.5% reward. (To find and compare cash-back rewards, use the Credit Card Analyzer.)
If you’re a light user, you may be better off in one of the cards that offer 1% from your first purchase, such as the no-annual-fee Chase CashBuilder, or one that offers higher rebates for certain purchases. The Toys R Us Visa, for example, has no annual fee and its 1% cash back is elevated to 5% when you use the card at a Toys R Us store. The Marathon Platinum MasterCard, meanwhile, waives its annual fee if you make at least nine purchases a year at a Marathon station -- plus you get a 5% reward when the card is used for
Know how much flexibility you need. This is where it gets really tricky. Consider the situation if your primary goal is to earn airline miles:
- If you’re a frequent flier on a single airline, you’ll earn rewards the fastest if you charge on the airline’s affiliated credit card. Each dollar spent earns you a mile, and you have opportunities to earn additional miles through certain purchases.
- If you have to use a number of different airlines, you might go with American Express or Diners Club, which both offer miles that can be used on a number of different airlines. Diners Club also gets you into airport lounges worldwide.
- If you travel different airlines but need a MasterCard or Visa, which are accepted by more merchants than American Express or Diners Club, you can choose a bank-issued card that has an affiliated “travel awards” program. Each dollar earns a “point” that translates into one airline mile. (Not sure if one of your current cards offers such a program? Call and ask.)
There are drawbacks to each option. The travel awards programs, as noted above, tend to have rewards that can expire unused. They also often cap the value of the airline ticket you’re allowed to purchase. While most frequent-flier experts advise not using your 25,000 miles to buy tickets worth less than $500, most travel awards programs won’t let you buy a ticket worth more than that.
Miles for plastic surgery, college tuition
Then there’s the issue of flexibility of use. The good news is that the airline and travel reward cards have gotten much better at offering alternatives to miles. If you don’t want to use your rewards for free tickets or upgrades, you can use them for hotel stays or certain merchandise.
The conversion rate, though, is generally pretty poor. While 25,000 miles could buy you an airline ticket worth $500 or more, it might buy a hotel stay worth half that much -- or merchandise valued at $100 or less.
With enough miles, though, you can design your own reward with Diners Club and American Express. A Diners Club program has allowed those with more than 100,000 miles to pay for everything from plastic surgery to college tuition.
If you’re not into miles, you can opt for a card with a very specific goal -- like the no-fee Nesteggz Loyalty Rewards Credit Card from MBNA, which can contribute 1% of your spending into your IRA, SEP or SIMPLE retirement accounts, or cards affiliated with BabyMint or UPromise, which make similar contributions to Section 529 college savings plans.
Or you can pay for your entertainment. Both Disney and Universal have credit cards (issued by Bank One and Chase, respectively) that give you points good for theme-park admissions, DVDs, movie tickets and other goodies.
For maximum flexibility, though, you’ll probably want to stick with a cash-back card and use your reward to buy whatever you want.
A final thought: Don’t let your lust for miles or other rewards lead you to damage your credit score, the three-digit number that lenders use to gauge your credit-worthiness. Maxing out any credit card can ding your score, even if you pay the balance off in full every month. Even applying for a card can hurt your score, so make sure you select your rebate cards carefully -- and sparingly. (For details on how credit cards can affect your credit score, read "4 steps to building great credit.")
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