Cardholders must read the fine print to understand clearly how their credit cards programs work.
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Credit cards that provide rewards ranging from frequent flier miles to cash can offer rich benefits to those who hold them. However, using the wrong reward card — or not clearly understanding all of its conditions — can cost more than it gives. Reward cards can have all kinds of pitfalls, from complicated restrictions listed only in fine print to frequent flier miles that expire before you can use them.
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“For someone to successfully exploit the benefits of a rewards card, you must be organized,” says Natalie Lohrenz, counseling administrator of the Consumer Credit Counseling Service of Orange County, Calif. “You almost need a spreadsheet to keep track of things, especially expiration dates, but most people aren’t that organized. Also you have to question whether the reward is something you would normally spend money on. If not, you’ll spend more than you would otherwise.”
Before you sign up for a rewards card, it pays to know exactly what, how and when you can cash in on those perks, as well as how consumers frequently get trapped.
Some should stay away
First, there are two categories of consumers who should probably avoid any kind of reward card, experts say: Those who don’t pay off their card balances in full every month and those who have trouble limiting their shopping.
“People who don’t have control over their spending tend to justify their purchases by saying, ‘I’m getting miles or another reward.’ It gives people an extra excuse to whip out that credit card,” says Lohrenz.
Why shouldn’t people who carry balances look at reward cards? “They tend to have higher interest rates than other cards, because card issuers are compensating themselves for offering the rewards,” she says.
Of course there are exceptions to every rule. For example, Discover Motiva cardholders who don’t always pay off their balance each month, but who do pay their bill on time for six months in a row, Discover will pay the next month’s interest.
Here are six of the most common elements of reward cards that can be unrewarding to cardholders:
1. Annual fees
Only about 20 percent of reward cards carry annual fees, and they should generally be avoided, experts say. “You only want them if the benefit exceeds the fee by more than what you’d get on a card with no fee,” says Ethan Ewing, president of Bills.com, a personal finance website.
“Anything over $50 or at most $100 is very high and should be avoided on any card,” says Ewing.
2. Frequent flier constraints
“The overarching problem with frequent flier cards is the issue of award availability,” says Tim Winship, editor at large for smartertravel.com. It’s often difficult to find seats on flights for which you want to redeem your miles.
All the major card issuers, such as the Citi PremierPass Card and the American Express Blue Sky card, have come up with offerings to address this problem, Winship says. These cards aren’t affiliated with a specific airline and allow cardholders to use their reward points to purchase standard-issue seats on a flight, rather than ones reserved for frequent flier miles.
“Because you’re buying your ticket on the open market, there aren’t capacity controls in place that bedevil people trying to redeem miles directly,” Winship says.
These cards aren’t a panacea, however. Kathryn Sanders, an Occoquan, Va., psychologist, has complaints about her Citi PremierPass Card. She obtained it about three years ago, enticed by the feature allowing cardholders to earn reward points from miles flown on flights paid for with the card. That’s in addition to points earned by purchases on the card.
However, Sanders didn’t realize that you have to have an equal number of purchase points before you can redeem flight points. “I just purchased four tickets to Europe, which will earn me about $3,000 in purchase points and about 30,000 flight points, but now I have to spend $30,000 in purchases before I can redeem these flight points,” she says.
Sanders says the stipulation was buried in the fine print of the card’s terms and conditions. She doesn’t think it’s fair that she should have to make purchases to match her flight miles on a card for which she pays an annual fee of $75.
Citigroup’s response via e-mail: “We go to great lengths to ensure that our marketing copy is very clear and understandable and fully discloses all attributes of our product. To date, we have encountered very little customer confusion or complaints related to flight points,” a Citi spokesman says.
Asked why the card has the matching purchase points requirement, the spokesman said, “Citi PremierPass is the only credit card that lets card members earns points for the miles they fly on any airline. This value proposition is unique, and we feel that it gives customers the most opportunities to get the reward they want fastest.”
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Getting the most from rewards cards
3. Difficult thresholds
Some cards require you to spend a lot of money before the rewards get appealing. For example, the American Express Blue Cash card offers holders 5 percent cash back on everyday purchases at supermarkets, gas stations and drug stores and a 1.5 percent rebate on all other buying.
However, those benefits don’t kick in until you’ve charged $6,500 on the card. Until then, you only receive 1 percent cash back for spending at supermarkets, gas stations and drug stores, and a paltry 0.5 percent on all other purchases
“For many cards, you can’t get the highest level of rewards before spending $450-$650 a month,” says Linda Sherry, director of national priorities for Consumer Action, a consumer research and advocacy group. “The cards will advertise the 5 percent. You’ve got to look at the fine print to see the limits.”
4. Slow and complicated payment
Some cards, including Citi CashReturns MasterCard, will send you rewards, such as a $50 check, as soon as you earn them, but others make you wait. The AmEx Blue Cash card, for example, doesn’t give you any cash back until 13 months after you’ve owned the card.
The Blue Cash card automatically credits your account on that 13th month. Other cards don’t make it so easy to redeem rewards points.
“Some cards will send you a voucher for this store or that store. Then you have to wait for it, make sure you don’t throw it away thinking it’s junk mail and make sure you use it by the expiration date,” says Lohrenz.
Many rewards have expiration dates, so you want to be vigilant about redeeming your points as quickly as possible to ensure you receive your benefits.
Cardholders are advised to redeem points within a month or two of receiving their card to make sure the redemption process runs smoothly. “It would be a shame if you rack up a year’s worth of rewards, and then you see it’s a pain in the neck to redeem them,” says Ewing.
5. Narrow bonus categories
Many cash back cards offer higher percentages back when you use the card at specific grocery stores, gas stations or pharmacies. That generally includes proprietary stores only for those categories. For example, you won’t get reimbursed extra for gas purchases at Wal-Mart or food shopping at Costco. So cards that at first glance make you think they will reimburse you for many of your expenses may actually not be as generous as they initially appear.
The Citi Dividend Platinum Select card gives bonus cash back (2 percent instead of the usual 1 percent) for utility expenditures, such as electricity and cable bills, but that doesn’t include phone bills.
The Citi spokesman says it excludes phone bills because “most traditional landline phone bills are not paid by credit card.” Cable TV bills are included, so cardholders who receive phone service through their cable company do receive the bonus.
“Most of the cards will have specific participating retailers, and people must pay attention,” Lohrenz says.
6. Cash back limits
Many cash back cards have annual ceilings for the money you get back. Check the fine print to see how much in rewards you can earn over a specified period. If you are going to pile up rewards higher than that amount, you either want to acquire a card with a higher limit or open several cards.
You may also want to have more than one card so that your balance on any one of them doesn’t exceed 30 percent to 50 percent of your credit limit. That’s because if you do surpass that level, your credit score may be reduced.
Reward cards can pay off handsomely for people who manage their cards responsibly, but you have to do your homework to make sure you get the card(s) that best suit your spending habits.
Related stories: “Credit card extreme rewards: It’s not just about the money,” “‘Experiential’ rewards let credit cardholders live out dreams,” “Drive for rewards pushes old-style gas cards in ditch,” “Despite no ‘blackout’ promises, fliers’ freebies limited“