Rewards credit cards are a money-saving tool for savvy consumers who can maximize their perks and avoid falling into debt. Many issuers will market their cards by offering rewards in the form of points, cash back or miles. However, a high rate of rewards does not necessarily equate to lucrative reward redemptions.
For example, Southwest Airlines recently announced that it would change the flight redemption rate for Rapid Rewards members from 60 points per dollar to 70 points per dollar after March 31, 2014. Yet there were no announced changes to the rate at which consumers earned points with Southwest-branded credit cards - consumers now get 1.4 cents per point, as opposed to the previous 1.67 cents. Effectively, reward flights will cost more, and the rewards-earning potential of Southwest's credit cards will be reduced.
This is one case in which a rewards program has gotten worse, but every credit card rewards program is different. Take these steps below before signing up for a credit card that promises loads of perks.
1. Choose the type of reward. Before applying for any rewards credit card, look into the types of rewards available for redemption.
--Points. It is easy to assume earning 2 points per dollar spent is the same as getting 2 percent cash back. Unfortunately, you might find that those points actually redeem for half the rate on cash back. For instance, Citi's ThankYou Rewards program requires 20,000 points for $100 in cash back, but only 10,000 points for a $100 iTunes gift card. So a Citi credit card that gave 2 points per dollar spent would effectively earn only 1 percent cash back.
--Cash back.You may find a straightforward cash back credit card to be a better option because you don't have to deal with varying points-to-value ratios. Rewards programs from card issuers don't necessarily require more points for cash-equivalent rewards. Chase and Bank of America are examples of two issuers that ask for 1 point per $0.01 redeemed as cash back. So when their credit cards market "X" points per dollar on spending, it also means you're getting "X" percent in cash back - even if they don't advertise it that way.
--Gift cards.If your ideal reward is a retailer-branded gift card, you may find better value for your points. Rewards programs often vary their redemption rates for gift cards - some may have a 1 point-to-1 cent value, while others do not. Card issuers also sometimes offer discounts on gift cards that are redeemed with points.
2. Look at the limits. Reward limits are a factor that differentiates rewards programs. Some cards will cap the amount of rewards that can be earned. For instance, the Citi Dividend Platinum Select card has an annual cash-back cap of $300. Other cards have limits on how much you can earn in a certain category. Usually, it's difficult to reach these reward limits, but it's not impossible for dedicated consumers who make the effort to maximize their rewards.
3. Weigh your options.You should never be in a hurry to sign up for a credit card simply because you saw an advertisement or commercial that boasts the ability to earn large amount of points. Those points might not be worth as much as you thought. Take time consider what rewards you would actually redeem. Then, you can look at that issuer's credit cards to see which one will generate the most rewards you want.
Simon Zhen is a columnist and staff writer for MyBankTracker.com, where he covers banking, financial technology and savings rates.
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