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With virtually all credit card issuers offering rewards, the issue is not whether you should get a rewards card, but what type of rewards card is best for you. But it's a confusing marketplace, with card sponsors featuring cash back, points and other incentives to get your business. To top it off, you've got to consider such basic factors as annual fees, interest rates and other terms, making the decision pretty complicated.
"When considering a rewards card, the most important issue is to put some thought into it," says Scott Crawford, CEO of Debtgoal.com, and a former executive in HSBC's credit card group. "You can look at something online or get an application in the mail that seems like the best thing ever, but if it doesn't fit what you're interested in, then it just won't work for you. Like if you have an airline miles card, but if you don't fly much, that isn't a really good deal."
Similarly, if you have a card that gives you points, but you don't remember to redeem them, having enough points to score a free iPod isn't worth much. Rewards cards that are less generous than others can also be problematic, as are ones with annual fees, high interest rates or onerous terms.
So here are the seven tips you need to keep in mind when adding a rewards card to your wallet:
1. Align rewards with your interests. Reward credit cards come in many different shapes and sizes -- generally allowing you to accumulate points toward merchandise, gift cards, airline miles or cash back -- so it makes sense to align rewards with your interests and goals. If you're hunkering down and trying to budget your income better, you might choose a card that offers points toward such basics as shopping at your favorite grocery store or points that will fill your gas tank. If traveling is your thing, an airline miles reward card for an airline that flies out of your local hub may do the trick.
Just don't pick something that you aren't likely to use. Also be wary of rewards that end up forcing you to spend more money -- such as those that you can redeem for gift cards at other merchants -- because you very well may end up spending more money on top of the rewards than you otherwise would have. You could choose a card that offers a choice of points or cash back and switch back and forth among those options as your needs dictate.
2. Don't forget about cash back. Cash back reward offers give you the most basic currency available -- cash -- to spend as you like. Although cash is a reward that is widely available, consumers don't choose it as much as you would think, mainly because you have to spend a lot of money to accumulate much cash, says Roger Brooks, vice president of sales and marketing at ValueCentric Marketing Group, a company that provides transaction-based marketing services. "It's hard to accumulate anything, you have to spend a lot to even get $20 back at the end of the month," he says. "From our experience, most providers feel that rewards are much more valuable than cash back because consumers would rather accumulate points toward something they want."
3. Compare the reward offer with others. A major mistake many consumers make is to add a credit card to their wallet on impulse, says Crawford. "I used to work in credit card marketing and it's amazing how little thought people put into getting a credit card offer. I would say that most credit card decisions tend to be made on impulse."
Instead of making a spur-of-the-moment decision, take a few minutes to compare what the offer is in front of you, or the rewards terms of the cards currently in your wallet, with others offered by the industry.
This table also allows you to compare interest rates and annual fees, although those will vary depending on your individual credit score and credit history. Be wary of cards with annual fees even if their rewards are more generous than others, because paying any type of fee may wipe out any advantage you gain in rewards. "You can destroy all the value of your rewards card even with a modest annual fee," Crawford says. "I have a United Mileage card that charges me $80 a year in annual fees, which means I have to charge $8,000 a year just to break even. Would I be better off getting a cash back card that doesn't have an annual fee? Probably."
4. Dump less rewarding cards. If you've got several cards, you may be diluting the impact of your rewards by putting charges on all the cards or you may be charging more on a card that offers less advantageous rewards than the others. Cards with annual fees and higher interest rates should be the first to go. If you are going to add a card while dumping others, look for a card with a competitive rewards program that also offers a strong balance-transfer program. Such programs typically include 0 percent interest for a period of time and may also offer double or triple rewards on balance transfers.
Also, before you decide to dump your existing cards, take a look at your financial situation. If your credit score has gone down or you're behind on your bills or you're close to the limits on all your cards, you may not be able to obtain a new card, as issuers are tightening lending criteria. Check out Balance Transfers 101 before you cancel an existing card or accept a balance transfer offer.
5. Run your spending through one card. After you've dumped your other, less-rewarding cards, if you still have more than one card, try to put the dollars that you typically spend through your credit card on that one card to maximize the value. It's not going to do you much good to have a great rewards card if you don't use it. Of course, you don't want to spend money you don't have just to get rewards, but if you typically do put certain expenses on your card, put those on the rewards card first. That way you'll get the most bang for your spending buck as possible in the form of your preferred reward.
6. Know when your rewards points expire. It used to be that rewards never expired; now it is more unusual if they don't expire. Be sure to check the fine print in your credit card agreement or on the reward affiliate's site to see when your particular rewards expire. "Typical reward expiration is 12 to 18 months, with some going out as long as 24 months," says Brooks. "Sometimes you can buy your points back after they expire, but it's best to use them before the expiration date. Typically, you'll get a notice, or two, before they expire."
7. Keep track of changes in terms. Credit card issuers are notorious for changing terms. When they do so, they have to notify you, but the problem is, you're not likely to even read what they send, since it generally comes in the form of a dense snail mail notice in fine print. However, a change in rewards terms, such as getting fewer points or a lower percentage of cash back, is something that will typically be disclosed in such a notice, so you need to take a minute to examine the notices your card company is sending you.
If a change in reward terms is material, you can always start the process of looking for another, more beneficial, card again. That's especially true if you have a good credit score and don't have a lot of cards with high balances. That makes you a desirable customer to credit card companies and means that you likely will find a better deal elsewhere.
See related: Debit card rewards programs gaining acceptance, Which is better: Frequent flier or cash reward programs, Give more with less through charity credit cards, Trips and traps of credit card rewards programs