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6 steps to minimize debt, maximize credit card rewards

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Reward credit cards can be a great tool. They allow consumers to earn points on charges than can be turned into perks such as cash back, air travel or merchandise. But reward credfit cards pose a danger as well. For consumers who let the promise of perks drive them to overspend, a rewards credit card can end up costing them significantly.

Still, experts say, consumers who stick to a budget and diligently track spending can maximize their rewards while steering clear of credit card debt. They recommend consumers pay their monthly credit card balances in full and on-time, while following six steps:

1. Select a credit card rewards program that matches your spending habits.
2. Read the fine print.
3. Make the most of your rewards credit card charges.
4. Pay for recurring, predictable charges with a reward credit card.
5. Link the credit card program to an employer's travel setup.
6. Don't put rewards in danger.

1. Select a credit card rewards program that matches your spending habits.  Consumers should look for a rewards credit card that offers perks on the type of expenses they frequently charge. While most consumers would enjoy a benefit from double rewards on gas and groceries (which are staple expenses in most consumer budgets), a frequent flier who lives in a hub city for a particular airline may want to choose plastic tied to that carrier, for example.

2. Read the fine print. Pay attention to exactly what the reward points can be redeemed for. "Rewards may not be worth as much as you think they are. Do a quick calculation to find how much the reward is worth," says Elaine Morgillo, a certified financial planner with the financial planning and registered investment advising firm Morgillo Financial Management of Maine and Massachusetts. Cardholders should read the fine print associated with the rewards card offer they are considering, taking note of the card's annual percentage rate (APR), any annual fees and rules on earning and using points.

Meanwhile, expiration dates on points and certain restrictions on redemption can make rewards harder to use -- something consumers need to keep in mind when choosing a card. "It's one thing to earn the points, it's another thing to use the points," says self-described "points junkie" Dan Sondhelm, a marketing consultant in Virginia. Consumers need to pay attention to whether their credit cards cap the number of points that can be earned. If so, they may want to have a backup rewards card on hand for when they reach that limit.

3. Make the most of your rewards credit card charges. With consumers now able to charge everything from a fast food purchase to a home mortgage payment, some experts recommend putting as much spending as possible onto rewards cards -- with one important caveat. Revolving a balance from month to month or getting charged a fee for going over a credit limit may end up canceling out any benefits a rewards credit card may offer. The cost of any interest rate or fee can negate the percentage of points earned. "You can't let the promise of rewards drive the decision to make a purchase," says Michael B. Rubin, author of "Beyond Paycheck to Paycheck."

Additionally, some issuers provide e-mails or newsletters to clue cardholder in to special promotions that offer bonus points for spending in a certain category or during a specific time frame. Consumers should be able to sign up for these alerts online.

4. Pay for recurring, predictable charges with a reward credit card. The chance to pay for recurring charges such as utilities, cable television and phone services on plastic offers additional ways to earn rewards. To be safe, consumers should inquire about any added fees for bill payment using their plastic.

Putting as many costs as possible onto a rewards credit card has some other benefits. For one, cardholders do not actually need to pay for their purchases until the end of the month, meaning that their money can continue to accrue interest in savings accounts during the intervening "float" period. Also, as with other credit cards, rewards cards provide consumers with tallies of their spending in the form of monthly statements. "For people who know how much they make and how much they spend, it makes sense to put every single dime on your credit cards. It's the easiest way to track expenses, provided it's paid in full," says Rockville, Md.-based certified financial planner Karen Schaeffer.

5. Link the credit card program to an employer's travel setup. Cardholders can also maximize rewards by using their credit cards for business expenses. Employees may be able to earn extra points by paying for business travel if their credit cards are tied to an employer's preferred airline or hotel chain. That way, they earn extra points as well as getting reimbursed by their employers.

6. Don't put rewards in danger. As easily as points come, they can vanish. Most cardholders know failing to make on-time payments, or other irresponsible behavior, can result in penalty fees, higher interest rates and damaged credit. They may not aware it can also cost them their reward points. "If you are late on that month's payment, you can lose the rewards for that month. And if you default on the card, all the points get wiped away," says Michael McAuliffe, president of Family Credit Counseling Service, a consumer debt counseling firm based in Rockford, Ill.

Late payments aren't the only way to lose points. A lot of the reward programs today have an expiration in place if things go dormant. In such cases, "Look for vehicles to transfer the points into an active account so you don't lose the points from previous programs," says Mark Shipley, Senior Vice President in charge of loyalty for MasterCard. For points that have already expired, a phone call to the issuer may convince them to reinstate your points.  

Consumers who know they can pay off their balances in full every month can take these steps to maximize their rewards. Individuals that have trouble making payments would do best to look for a low interest rate credit card instead. After all, says Gail Cunningham, Vice President of Business Relations for Consumer Credit Counseling Service of Greater Dallas, "There is no amount of points that can compensate for digging yourself into a financial hole."

Updated: February 27, 2008


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