Credit Card rewards: Or charging your way to a free trip...to the poorhouse?
Jan 3, 2005
The Bottom Line Again, with any credit card program you need to read the terms and disclosures and then see which program fits you the best!
Free airline miles, hotel stays, gasoline, points, even cash. Rewards credit cards come in a wide variety of flavors from the vanilla straight 1% cash back all the way up to points which can get you a trip in Caribbean cruise liner for 2 weeks in Rome! So what's the deal with all these rewards? How do they work?
Well here I go again. The number one thing to do is read all the terms and disclosures that go along with the rewards credit card you're interested in. The reason why is despite the straight forward approach they might be offering "Up to 25% off your online purchases!" the truth is a lot more sinister. I'll break down the basic rewards cards into the following categories: Miles, Points and Cash.
Ahhh airline miles. The promise of free travel to wherever you want just for using a little piece of plastic instead of paper. The program I'll focus on here is the most popular mile program, the Citi/AAdvantage miles card. This card offers the 1 point/mile reward that is most typical with mile cards and has a rewards schedule that is also very common. For a roundtrip economy ticket anywhere in the contiguous 48 states it will take 25,000 miles.
Sounds like a lot, but then they usually will give you anywhere from 5,000-15,000 miles just for opening an account. A couple of purchases and you're already there...right? Well not necessarily. A few things to look out for are blackout dates and when your points expire. This card promotes itself as having 'no blackout dates' which is actually just a half-truth. While you can choose travel anytime, you will get charged additional miles if you want to fly during the popular times of the year! They do this a little discreetly by using strange labels such as "MileSAAver Off-peak", "MileSAAver Peak", and "AAnytime" fares, each one with different redemption amounts. So if you really want to fly round trip to Hawaii anytime, it could cost you TWICE as many miles (70,000 vs. 35,000) !!
Also, with AAdvantage they have changed the way their miles expire. Miles earned will expire after 36 months if no new activity has been charged with your card. If you do purchase something, before that time all miles are bumped forward and won't expire until there is a solid block of 36-months with no activity. I think this is a very fair system as you will still be protected from expiring miles with just light usage on the card.
However, all this comes with a price. And depending on how prestigious you want your card to look/sound you will pay even more. The current annual fee for the generic AAdvantage card is $50, this is increased to $85 for the Platinum which also has a requirement of 100,000 miles earned/year to qualify. Wow. So if you spend about $800/month on your Citi card and get a promotion with 10,000 miles for signup, it would still take more than a year and a half to get that 'free' ticket. Two tickets? Well that's 3 years, and if you don't travel during off peak periods it will take over 6 years. Add in the $50 fee per year and you also spent $300 towards those tickets.
You can see how they can tip the scales in their favor without trying. Another way is by hoping you purchase miles so you can take that trip prematurely. While it does give you options, I don't exactly consider selling 1,000 miles for $52.50 a steal. Airline miles do have their place though. As a business owner or purchasing agent you could easily rack up tons of purchases and get free travel without trying very hard. Or if you also fly American Airlines a lot you can earn miles even faster with this card and be on your way sipping champagne and eating crummy peanuts quickly. But for the average consumer, you're going to have to crunch the numbers and see if this card would work for you. To do this, figure out what reward you are shooting for, then figure out how long it would take with your average annual credit card purchases, make sure to factor in any annual fees and miles you may already have. You might also want to get a quote from a ticket agent to see if the redemption chart is giving you a value of less than $1.00 / 1,000 miles. If so, runaway, FAST. You're going to want to see a value of about more than $1.20 before considering the card.
Just a few months ago American Express was offering flights in Russian Mig fighter planes for using their credit card! It seems however they have updated their reward schedule and removed that item, but added in quite a bit. Yes, that's right, for the Points section I will use the American Express Membership Rewards program as my example. It's a fairly big program, as nearly all American Express cards are eligible for it, and it's comparable to other point programs out there.
Like most point programs, you earn 1 "Membership Reward Point" (hereon out called just point(s)) for every dollar spent. This program is best for people who have NO IDEA what they want and plan on using one card exclusively for most purchases. The reason why is that it will take a while to earn enough points for a decent 'prize' and that most places have a large catalog of various gifts; from little $20 Blockbuster cards to season tickets to your favorite sports team!
The American Express program has no fee for enrolling (most don't), points never expire, there is no limit on how many points you can earn and best of all there are bonus opportunities to earn additional points. Basically this card works like a straight 1% rewards card. The best way to figure this out is to find a prize that has a dollar value attached to it--gift certificates, then determine how many points it requires and then how much you'd have to spend to get the reward. With American Express they make it obvious, at 1 point per dollar spent, it would take $1,000 to earn 1,000 points--the amount it takes to get any $10 Gift Card they offer. It's a simple 1%. Well not SO simple, if you wanted to get something much closer to cash...say an American Express preloaded charge card or Traveler's Cheques, well then they require you to use twice as many points. Not very rewarding, but still if you wanted a cash reward card, then you would get a ...
Cash Reward Cards
Cash is king, and the same goes for credit card rewards. At the end of it all I prefer a nice check to any airline ticket, boombox or novelty you can throw at me. For this section I am also including any gas cards such as the Chase PerfectCard or ExxonMobil card. These work in basically the same way except gasoline purchases earn a greater reward.
There are all types and flavors of cash rewards cards. The first thing to look at is tiers. No not the things that come out of your eyes during sad movies, TIERS. Tiers are how they structure the reward they calculate for you at the end of the year or month. Cards either have no tiers or tiers. Discover is a good example of a tiered cash reward program (another one is the new Stockback card). Offering 'earn up to 2% cash back' it can be enticing for those who don't read the rules! Basically how it works is the more you spend, the more cash back you can earn. Monthly spending under $500 might only earn you .5% cash back, while everything from $500-999 earns 1%, and everything $1,000 and up earns 1.25%. Of course these numbers are just made up as I haven't been able to find the exact tier structure on Discover's webpage. It seems they don't want you to know just how much darn money you have to spend just to get that "2%" they offer.
Even with tier cards there are two types. The first is where your rewards is calculated (using the numbers from above) by finding .5% of the first $500, then 1% for the next $500 and then 1.25% for any spending over that. The other is where if you just hit the threshold the ENTIRE monthly charge will be calculated using the highest reward tier. So if you spent $1,200 you would get 1.25% of that or $15. The other way only nets you $10. A 50% difference! I am a big fan of just STAYING THE HECK AWAY from tiered rewards cards. More often than not they are very confusing and you have to trust the company doing the math. Usually they are only worth it for big spenders--people spending well over $1,500 per month. Otherwise, stick to the straight rewards cards.
A straight rewards card offers you a certain percentage back in a reward. Usually this is 1% for most purchases with a bonus percentage for other purchases (gasoline, grocery stores, restaurants, etc.) At the end of the month they figure out how much was eligible at 1% and how much was eligible at the bonus percentage. There's your reward. How they give it back to you varies quite a bit. Most likely the credit card company will apply this reward to your NEXT credit card statement. This is a very common practice, Chase's PerfectCard does this, and so did the Citi ExxonMobil. However, it doesn't feel like you're getting a reward because you never get any cash in hand. Some companies do give you cash; the Citi Dividend Platinum card will give you a check anytime you request it, so long as you have earned $50. It might take a while, but it's still nice to have that feeling of a nice check coming in the mail.
At the end of it all, there is no right card for you. I can't recommend one card over another, simply because everybody's situation is different. But what I can tell you is that there are good rewards cards and bad rewards cards. I still can't say which ones are good and which ones are bad, because depending on how much gas you pump, miles you fly, groceries you buy, dollars you spend a card that I might hate might work perfectly for you. The point is this, rewards aren't simple, they might expire, have blackout dates, maybe they won't even come until the anniversary date of your signup, but you must know what to look for. Arm yourself with knowledge and examine the rewards schedules carefully, and most importantly, hammer the Customer Service Reps with a carefully prepared list of questions!