Credit Card Rewards

With so many credit card rewards programs out there, it may be difficult to figure out exactly which ones actually reward you the most.  There are various affinity cards, cash-back, frequent-flier miles, points of various sorts.  So how does one figure out which one actually will generate the most useful benefits?

First, a couple of points which may seem obvious, but because of how confusing the programs may get, these points may get lost in the mess:

One - it doesn't matter how generous a rewards program is if the reward is one you don't actually use.  If the frequent-flier miles only buy you flights on an airline that you never take, or the blackout dates make the use of those miles impossible, then it doesn't matter how many you have, they aren't doing you any good.

Two - there are no rewards programs which adequately compensate one for paying interest on your credit cards.  If you are carrying a balance, you shouldn't be looking at the rewards program but rather, looking at finding the lowest interest rate and trying to pay that balance down a fast as you can.

So, assuming you are, in fact, paying off your credit card balance each month, it may be time to consider the actual rewards themselves as well as the programs.

The most well-known, of course, are the frequent-flier mile programs.  Typically, they pay you one mile per dollar spent, and it takes 25,000 or so miles for a round-trip domestic ticket.  Moreover - and this is frequently overlooked - when you trade in miles for a ticket, you usually don't actually earn miles on that trip, either.  If the average domestic round-trip for which it's worth using miles is, say, 4000 (since shorter trips may be cheaper to just pay cash for), the total "cost" for the trip is 29,000 miles -- or you spending $29,000 to earn that ticket.  Only you know the average cost of plane tickets you've been buying, but considering the alternatives - it's easy enough to find cash back cards paying you 1% - you're giving up at least $290 which you'd otherwise have had for that ticket.  And, again, the blackout dates and limited number of ff-mile-reserved seats may make those miles a lot less useful anyway.

Probably the best reason to keep a frequent-flier-mile card is, if it's a free card - and only then - and you make some small periodic charge on it only to earn a couple of miles so that miles you already have don't expire.  Most airlines will start expiring your miles if you aren't adding to or using them regularly.  This may be a means to keep miles alive.  Delta, for example, has a program with American Express where their no-fee card (most of their cards have annual fees) earns 1/2 mile per dollar.  That's half the normal going rate, but if you just charge one small thing to it on a regular basis, it'll be enough to keep however many Delta miles you've already accumulated from expiring.

Next up are the wide variety of store-credit programs.  Most come in the form of either building store credit, or earning gift cards to use at the stores.  Typically, they pay about 1% back, sometimes more for purchases at the sponsoring store.  These may be great if and only if you shop regularly at the store in question.  Store credit at a store you don't shop in frequently is store credit you won't use -- good for the store, not good for you.  Gift cards add another layer of complexity, too, since you often actually have to carry the gift card with you as well and you have an opportunity to misplace the card somewhere between earning it, (sometimes you have to actually ask them to send it, too), and spending the money.  Two last points about these programs - if you have store credit that you haven't spent and the store goes bankrupt, you may be in line with the rest of the creditors, likely down at the bottom of the list, in trying to get at the money you've earned.  Probably the most well-known such bankruptcy which left holders of gift cards and store credit out to dry was Sharper Image, which went bankrupt in early 2008.  The other point is to watch gift cards carefully.  Some of them, in states where it's not illegal for the stores to do so, start losing value if not spent.  The bottom line - if the store credit program you've found pays you well for purchases you frequently make and you shop at that store a lot, these programs may pay off, but you'd best spend the earned rewards as fast as you can once you've earned them.

Before we get to the rewards programs that are probably the best for the most folks, a brief note about the programs which don't actually pay you any rewards directly but instead generate donations to your favorite charity or your alma mater or other organization: in these cases, the organization is getting cash that you could have had.  You'd probably come out ahead getting the cash yourself - even if you got exactly the same amount as the organization would have (and they rarely actually tell you how much the organization is getting), you could donate that cash to the organization yourself and in many cases, also come up with a tax deduction for yourself at the same time.

So, finally, what's the one reward that everyone - everyone - can use?  Cash, of course.  You can spend it at any store, not just the one sponsoring the card.  There are no blackout dates.  If you accumulate some of it but don't get to spend it immediately, you can earn interest on it.  And here's the best part - some of the cash-back rewards programs are quite generous.  Unfortunately, some of the most generous ones are being cut back or discontinued.  For example, the excellent Chase Rewards card which paid 5% on groceries, gas and pharmacies and 1% on everything else was replaced a couple of years ago by the Chase Freedom card, which is 1% on everything plus 3% on certain rotating categories.  And Chase is even trying to discontinue the Rewards card for folks who got in before the switchover by trying to convince them to switch to a Chase Sapphire card which has some other benefits, but the points are a flat 1% for the most part.

Other cash-back cards do some things like start you out at lower percentages until you've spent a certain amount of money.  Best to look for cards which pay you the full amount on the first dollar, unless you are ready to do the math and know pretty well how much you're spending on the card.  Even so, most programs cap out at 1% above that ramp-up level, so in most cases, there's no math to do.

Additional programs which currently seem to have decent cash back rewards:  Capital One No Hassle card - 1% on everything, 2% at gas stations and grocery stores;  Costco American Express TrueEarnings - no annual fee with a paid Costco membership and 3% back for restaurants and gas, 2% for travel and 1% everywhere else including Costco itself.

One particularly generous pair of programs are the Fidelity Visa and American Express cards.  The rewards are cash contributions to your Fidelity investment accounts (including 529s and IRAs).  Their programs are paying as much as 1.5% or 2%.

In the end, only you can know for certain which reward program, if any, makes sense for you.  But before you worry about the rewards, make sure you're paying off your balance every month.  Earning small (1% or so) rewards while paying double-digit interest on debt is a losing game.  And make sure the rewards you are earning are actually as valuable to you as they appear.  Rewards earned but not cashed in are rewards lost.

Some sites to use to investigate available credit card deals:

If folks have other suggestions - either specific cards or websites, or even feedback about the customer service (something we didn't discuss above), please post them in the comments or e-mail them to us here!

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