We all have friends who have planned amazing trips or gotten a brand new mixer based on their credit card rewards. Credit card rewards can be great because they are free money (provided you aren’t paying annual fees or interest).
The question is, which type of rewards card makes the most sense for you. The biggest division is between those that provide airline miles (or other types of specific discounts) and those that provide cash back on your purchases. Here are some tips to help guide you.
Cash vs. Miles: Match Your Spending Patterns
Pick the rewards package that fits your goals and lifestyle – and either get a no-annual-fee card or make sure that the rewards offset any fees.
Cash back reward credit cards have the advantage of flexibility. You can choose to spend that cash on travel or use it for other purchases you’d like to make.
Miles are more limited, but they can be a good choice if your lifestyle involves travel – or you hope it will in the future (maybe you need a little motivation to start planning that trip to Spain). Usually airline miles build up at about the same rate as cash rewards (1% or 2% is standard) and there may be an incentive for signing up. These sign-up bonuses are probably the best rewards you will get out of your credit card, so take advantage while you can. Some miles cards also let you use the points for other travel purchases besides airline tickets, such as hotel rooms or rental cars.
There are two main types of travel cards that deliver rewards in miles: airline- or hotel-specific cards, and more general travel cards.
Airline- or hotel-specific cards will limit your ability to shop for the best deal because you are only earning rewards with one company, but the points can sometimes be redeemed at rates that are more like 3% or 4% (rather than the 1% or 2% of a cash back or general travel rewards card). This is especially true during off-peak travel times – if you are trying to travel during the holidays, expect lower reward returns and beware of blackout dates. Airline-specific cards might throw in added perks, such as free upgrades, waived baggage fees, priority boarding or access to airport lounges. (See Top Credit Cards For Airline Miles Travel.)
General travel cards have the benefit of flexibility among companies, but will get similar rewards rates as a cash reward credit card. Beware of blackout dates for general travel cards. Don’t expect to get upgrades or special treatment with a general travel credit card – this type of card is the equivalent of a cash rewards card in its payoffs and perks, except that the rewards must generally be spent on travel. (For more, see Do Your Card’s Travel Benefits Make The Grade?)
Before You Sign Up
If you carry a balance on your credit card month to month, even the most generous rewards program will be reduced by the amount you are paying in interest (this is how credit card companies make their money, after all). If you are in credit card debt, focus first on paying off your debt. After all, rewards aren’t free if you are paying a high interest rate to earn them.
An additional catch is the annual fee. Some of the more generous rewards cards have annual fees – in order for you to recoup the cost of owning the card, you have to spend enough money on that card each year to reap rewards that make it worth it. Before signing up for a card with an annual fee, look beyond the first-year signing bonus or fee waiver and calculate how much you will need to spend each year to break even. Figuring this out may be a little tricky because sometimes you have to convert miles into dollars, but it can be done. For example, look at theCapital One Venture Rewards Credit Card.
- 50,000 miles = $500 in travel. That means each mile= $.01. (You have to spend $3,000 within the first three months to get this one-time bonus.)
- You earn 2x miles for every purchase- so for every $1 that you spend, you earn $.02 in rewards. (This is the same as earning 2% back).
- The annual fee is $95 after the first year. Earning $.02 for every dollar you spend means you will have to spend a minimum of $4750 on your card each year before you start earning free rewards.
The card also has no foreign transaction fees, the miles don’t expire and there are no blackout dates for redeeming travel points, which can be spent on any airline and hotel. However, there is no introductory APR for purchases or balance transfers.
The Bottom Line
Before choosing a card, look at your past spending history: Do you spend enough to make it worth it? If not, there are many no-fee credit cards that offer rewards that are truly free.
Then, read the fine print. Are there many blackout dates that would limit your ability to use your travel rewards? Do your rewards expire? Are there ways for you to earn more (such as making online purchases through your credit card rewards website)? Paying attention to these details can help you optimize your rewards so that you can get the most out of the benefits your credit card offers.
If you don’t think you’ll use travel rewards enough – and you can’t spend them in enough places – opt for the flexibility of a cash back card. You may earn a little less, but will probably be able to take greater advantage of the benefits.