Seven Ways to Spot Unrewarding Rewards Cards

Rewards credit cards can offer some pleasant savings that
nonrewards cards can't. How much you'll make back depends on the card
you choose and your spending.

Before you shop, find out what kind of rewards card makes the most sense
for you. Then you can start comparing cards on sites such as Bankrate, LowCards and CardRatings.

As you examine different rewards cards, look for the following
"gotchas" in the terms and conditions.

Annual fees

Some rewards programs impose annual fees that could eat into
the benefits of using the cards. For instance, airline cards branded
with a particular carrier can have steep annual fees in the $80 or more
range, says Curtis Arnold, founder of CardRatings.com. Typically, he
says, you have to earn 25,000 miles to get a free ticket. Assuming you
spend $8,000 a year on the card, and get a point for every dollar
spent, it would take you more than three years to earn the free flight,
and by then you'd have spent $240 in annual fees. You can get a
round-trip ticket with a discount carrier for $250, Arnold says.

The advantage of paying that steep fee is the ability to
combine earned miles through the card with frequent-flier miles, but it
may make more sense to go with a straightforward cash-back card and
simply buy a ticket through a discount carrier.

As for other cards, if they charge an annual fee, consider
whether the benefits outweigh the cost. Looking at your current
spending habits, do you anticipate charging enough to offset that
yearly $49 pinch? If not, look for a card without an annual fee.

Expiration dates

Some rewards cards put expiration dates on rewards earned.
Comb the fine print for that important restriction, because it may mean
you won't have enough time to earn and use the points.

Take the example of the National City Visa card that Consumer
Action surveyed a couple of years ago. The program advertised up to 4
percent cash back on purchases. "However, when you look at the fine
print and run the numbers, it's actually possible to spend, over a
four-year period, up to $50,000 on this card and not get back a penny
in rewards," says Consumer Action spokesman Joe Ridout.

With this card, points expire after two years, and if
purchases don't fall into special categories that earn higher returns,
you'd only earn one-quarter of 1 percent on the first $10,000 for a
year.

"Say in year one you spend $12,000, you'd get back $25 on the
first $10,000, then you'd start getting 1 percent after that," he says.
"In the first two years you'd ring up about $60, plus or minus a couple
dollars. But then those same points begin to expire because it's been
two years and points expire after two years. You're accruing more of
these points, but the ones from year one are expiring. This is the
other catch: You cannot redeem these rewards until you've built up $100
equivalent. So you would never actually get to the point where you
could redeem these rewards."

Low
caps

The
issuer may also limit the
amount you can earn, called a cap. A low cap would be $300 or less,
according to Arnold. The Citi Dividend Platinum Select card restricts
cardholders to $300 in annual rebates. Arnold says to shoot for a $500
cap or a card without one.

Examine your spending to see if a cap
would impact
your savings. If you would earn only 1 percent cash back and had an
annual $500 cap on rebates, you'd have to spend $50,000 before hitting
the limit.

Low returns on cash-back cards

"Anything above 2 percent is pretty good,
anything closer to 5 percent is just fantastic," says John Ulzheimer,
president of educational services for Credit.com and author of "You're
Nothing But a Number." He says not to focus too keenly on the higher
returns because issuers usually set caps.

Anytime you see an ad offering "up to" a
high-percentage cash back, it means the card probably has tiered return
rates. Until you hit a certain spending threshold, you won't get the 5
percent cash back advertised. Or you may get higher returns only on
purchases in certain categories, but not on those in other categories.

Arnold considers 1 percent the baseline
rate.

Tiered
return rates

If you're what Arnold calls an
"aggressive charger" -- someone who charges $1,000 or more a month --
you might get a good return by using a card that offers tiered rates. A
tiered-rate card offers more cash back after you hit a spending
threshold. For example, Blue Cash from American Express offers 5
percent cash back on everyday purchases at supermarkets, gas stations
and drugstores, in addition to a 1.5 percent return on all other
purchases after the cardholder spends $6,500 on the card. Arnold, who
has the Blue Cash card, says it makes sense for him because his family
can reach the threshold. People who spend only $500 a month on the card
won't hit the threshold and will instead earn 1 percent back on
everyday purchases and half a percent on other purchases.

Examine your typical monthly credit card
spending to determine how
quickly you would reach the highest tier, if ever. People who charge
very little each month may do better with a card offering a plain 1
percent cash back on all purchases.

Merchant
restrictions

Issuers of cash-back rewards
credit cards like to advertise the cash-back rate you can earn for
charging "everyday purchases." Unfortunately, the everyman's definition
of a grocery store, drug store or gas station may differ from the card
issuer's. For example, the Chase Visa Freedom Card has some significant
exceptions that may surprise people, says Ridout. "Like, if you do your
grocery store shopping at Wal-Mart, that's not a grocery store,
according to Chase. If you do your shopping at Whole Foods, that's not
a grocery store."

Chase also doesn't count KFC, Popeye's
Chicken or Papa John's as
fast-food purchases, which are eligible for 3 percent cash back.
Telecom purchases exclude Sprint and Verizon.

Look in the terms and
conditions for the definitions of qualifying purchases. Think about
whether you frequent the merchants and restaurants that count toward
points or rebates.

He says that consumers can try calling
customer service to ask about exceptions to each rewards category, but
representatives may not always know. Check your statements to make sure
your purchases are getting coded as they should be. 

Cumbersome rewards redemption

When
you've spent enough to earn some cash back, will you automatically
receive a check in the mail or will you have to initiate the redemption
process? If you hate mailing rebate forms, you might want to search for
a card that offers automatic rebates. The Citi CashReturns MasterCard,
for example, sends its cardholders a check when they've earned $50 in
rewards.

Pay close attention to the amount you
need to spend in
order to get cash back. With the Citi CashReturns card, it takes $5,000
to earn back $50, after the teaser return rate of 5 percent expires
after three months.

Some issuers only provide rebates
annually, so find out how long you must wait before redeeming rewards.

Make a spreadsheet

To make comparison easier,
create a spreadsheet to document the
differences between cards, says Bill Hardekopf, CEO of LowCards.com.
Use it to document bonus payouts for certain purchases, as well as the
maximum payout for each card, for example.

"You want to get it to a point where
you're comparing apples to apples," he says.

Avoid spending to save

Once you obtain a rewards
credit card, remember that charging
everything to your new card to earn points can hurt your credit score.
Great credit scores stand to suffer the most.

"For example, let's say someone has a
score in the low 800s, which is a fantastic score," says Ulzheimer.
"One of the reasons why they have that fantastic score is because they
have a very low utilization. Let's say hypothetically that they opened
up a brand-new rewards card with a $10,000 credit limit and then went
out and went hog wild because maybe the first two or three months they
got double points, which is common in the rewards world, and they go
out and they charge a $6,000 flat-panel television, a $3,000 couch and
$700 on dinner and clothing. Well, now we're $9,700 into a $10,000
credit limit -- we're 97 percent utilized. That in and of itself could
cause that low 800 to drop to a high 600."

He says if people plan to buy a home or
car in the next 12 months, they shouldn't charge more than 10 percent
of the limit. "Now, that doesn't mean you can't go out and use it; what
it means is you can't revolve more than 10 percent month after month or
your credit score will never fully recover. You have to have the
ability to write a big check at the end of the month and pay it back
down to less than 10 percent. You still get the points, but you're also
saving your score at the same time."

Don't hoard your rewards

Besides the fact that rewards
can expire, issuers always reserve the
right to change the terms of your rewards program. "It's common for
credit card rewards programs to suddenly increase the number of points
you need to redeem for, say, an airline ticket, or as Discover has
done, reduced the amount of rewards you're effectively able to accrue,"
Ridout says.

You might also forfeit your rewards if you go into default,
or let your account go inactive.

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