Some Thoughts on Rewards Cards

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Almost every day, I’ll get an email or two from a reader wanting me to evaluate a particular credit card with a rewards program associated with it.

“Is the Chase Amazon card a good deal?”

“Does that Target Visa really pay off?”

“Is the points program on this card better than the points program on this other card?”

Here’s the deal: the same exact set of ideas govern how I would answer all of these questions – and many more questions like them. It also governs how I handle my own reward credit cards.

Ready?

It doesn’t matter what rewards card you have if you’re carrying a balance. Let me repeat that. The reward program for your card doesn’t matter at all if you’re carrying a balance on it. What matters in that case, far above all else, is the interest rate on the card.

Ideally, you’ll never carry a monthly balance on a credit card. That’s what I’ve managed to do for the last several years, to my own relief. A balance on a credit card means that you’re going to be paying interest to the credit card issuer at an interest rate designated by them. You don’t want to be doing that, because that interest rate is often a painful one.

However, I know that many people do carry balances on their card. If you’re in that boat, the number one factor you need to be looking at – by far – is the interest rate on your card. The rewards program is of tiny consequence next to the interest rate. A card with no rewards program that offers a 7.9% APR is far better than the best rewards program out there on a card that has a 14.9% APR if you’re carrying a balance.

Once you’re past that step and aren’t carrying a balance on a card, it’s worthwhile to note that the best rewards program is the one that’s effortless for you. In other words, it’s the one that most closely matches what you buy and where you buy it.

For example, if your grocery store that you shop at every week has a credit card offer, it should go right to the top of your list, simply because such a card will often offer in-house rewards that will defeat almost anything else you can get. If your gas station that you always fill up at has a credit card offer, you’ll want to look at that one first, too.

It’s not too hard, with the right card, to get a 6% or 7% return on your card use (assuming, of course, you pay off your balance in full each month).

I’ll use a simple example. Let’s say you do your grocery shopping, department store shopping, and pharmacy business at your local Super Target. The Target Visa gives you 5% off on all purchases. On top of that, when you fill ten prescriptions using that card, you receive an additional certificate giving you another 5% off of your purchases for a single day. With some planning, that’s easily going to be 6% off your spending at that store. (However, it doesn’t save you a bit when shopping elsewhere.)

There are many similar cards tied to specific retailers. For example, if you live in an area where your local BP station offers the best gas prices, a BP Visa card will give you a 5% rebate on all gas purchased there.

The rewards on cards like these, when matched with a retailer you already use, is far ahead of the rewards you can get on non-specific cards. The advantage with cards like these is that you don’t have to do any planning or any extra purchasing to get the rewards. They’re just already in line with what you do.

What if you truly don’t have any cards available that match your regular retailers? To be honest, most of the non-specific programs are pretty similar. The best ones offer a reward of around 2% of your purchases and sometimes include a small signup bonus (some include a larger signup bonus, but with restrictions).

This brings me to my third point. No rewards card is worth buying stuff you wouldn’t already buy. If you have to make qualifying purchases, start shopping at a different store, or have to spend a specific amount each month, just skip the program. The cost and effort associated with having your spending dictated by a company exceeds any rewards.

So, if you want to find the best rewards program, do three things. First, don’t carry a balance on your card or else you’re just wasting your time. Second, choose cards in line with how you already shop. Third, avoid cards that require you to buy more stuff or shop in different places. If you follow these three guidelines, you’ll quickly arrive at the right rewards card for your situation.

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12 thoughts on “Some Thoughts on Rewards Cards

  1. I would also add: avoid “points” cards. Banks know that customers don’t check the value of the points very often (insider info), and will raise the thresholds when they think they can get away with it.

    Also, if you can find a card that credits your cash back right to your statement (rather than having to save it up and ask for it) that is preferable.

  2. Very true! Credit cards are a responsibility and should be treated as such. Learn about the cards you apply for and only charge what you can pay for each month.

  3. I agree with Trents summary points about rewards cards.

    One nit: I think getting 6-7% cash back is actually very hard. In fact I don’t think thats really obtainable with credit card rewards except for that 5% rate at Target which is limited to purchases at Target. 1-2% rewards is more typical and feasible. You could juggle a bunch of cards to maximize their rotating 5% bonus rewards and maybe get near 5% optimally but that requires a lot more work. Theres always promo deals and tricks to maximize your rewards but expecting 6-7% in general isn’t realistic.

  4. Steven, Maybe check your credit unions. Our local credit union offers cards with rates “as low as 7.25%”. I don’t have one of their cards and I don’t know how easy it is to qualify for that 7.25% rate.

  5. I use Discover when they have the 5% cash back on Gas (usually up to $300 worth over a 3 month period) and Groceries (usually up to $200 over a 2 month period). I keep careful track and when I reach the $200 or $300 limit, I put the card away until the next promo time. I always pay the whatever the balance is when it posts.

    I have a Visa card that gives 2% cash back on everything, all year long. I use it for nearly everything, except my garbage bill – I don’t want to burden my garbage guy with a transaction fee on my $16/month garbage bill. Again, it’s paid off each month.

    I think this is OK as long as you have the discipline to pay off the balance each month. I don’t charge anything unless I have cash to pay for it outright.

  6. @Steven – PenFed credit union has a card that’s 7.49%. It goes up after 3 years, but hopefully that is enough time to pay off the debt. Like jim said, maybe other credit unions have similar?

  7. Rewards really start to add up if you travel a lot on business and can run your travel, meals and entertainment through your own card, or if you own or pay the bills for a small business on your card.

    Our focus for several years has been college funding. We’ve been using a MasterCard issued through Fidelity and linked to my son’s 529 college fund for more than 10 years. It offers 1% back up to, I think, $1,500 a year. Over the years, we’ve earned more than $10,000 for the 529 account.

    I recently discovered that Fidelity also issues an AmEx that’s even better: 2% on everything, with no annual limit. That card’s been getting a lot of use since we got it.

    Chase has a small-business card called Ink that rebates 5% on office supplies and telephone, and cellphone, and Internet providers; 2% on restaurants, and 1% on everything else. Rewards are redeemable for gift cards, as well as cash.

    Discover allows you to redeem points for gift cards, many at a discount of 20% (e.g., $40 in rebate dollars gets you a $50 card). Chase Freedom also allows redemption for gift cards, but the discounts aren’t as routinely available.

    And Chase also has an Amazon.com card that gets you 3% on Amazon purchases, 2% on gas and restaurants, and 1% on everything else. You used to have to get certificates, but, lately,your points balance has been linked to your Amazon account, and you can use the points just like cash at checkout, seemlessly.

  8. This is another time when tracking your spending comes in handy. From my budget spreadsheet, I can easily calculate how much I spend on a particular category or retailer, and how much spending I put on credit cards in an average month. That makes it easy to figure out what rewards cards will give me the best return and how much I can expect to earn.

    Right now, my primary card is a Fidelity Investment Rewards American Express that gives me 2% cash back on everything. The only problem is that they don’t have a way to pay the balance in full automatically — I have to go to the web site and type in the amount every month. I also have a Chase Freedom Mastercard that has rotating categories for 5% cash back (1% on everything else). I use that one if I’m making a purchase in a 5% category or at a place that doesn’t take American Express. You can get slightly better rewards on a card with an annual fee, but I would never pay a fee to use a credit card, although it may be worth it for people who spend a lot on credit cards.

  9. Forgot one: BofA issues a MasterCard that links to a 529 plan sponsored by Upromise. The rebate is 1%, but it’s multiplied when you shop at many online retailers and pay with the card. (Installing the Upromise toolbar in your browser will let you know when you’re shopping at a participating merchant.) I bought some stuff at Lowes.com last week for in-store pickup and earned 3% back for shopping at the site plus another 3% for paying with the Upromise MasterCard. Plus, I didn’t have to prowl the store aisles looking for what I wanted! Lots of other retailers and websites are linked with Upromise: Hotels.com, Sears.com, Walmart.com, Samsclub.com …

  10. Some good cards have been mentioned above, but one of my favorites is the American Express Blue Cash. It gives you 1.25% cash back on gas, supermarkets, and drugstores and 0.5% cash back on everything else until you spend $6,500 (resets to $0 every anniversary), whereby the cash back rates become 5% and 1.5%, respectively. Consider this card is you spend a lot at the gas pump, grocery store, or drug store.

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