6 Worst Ways to Use Credit Card Rewards

by Melody Warnick | Jul 15, 2010

In the land of credit cards, all rewards points are not created equal. Airlines are becoming stingier in the ways they redeem miles, rewards catalogues are full of overpriced goods, and some cards will even slash your cash back at certain times of year. Meanwhile, banks have recently reduced the value of their credit card rewards programs, so, depending on the prize you choose — gift cards, plane tickets, an iPod — points can swing in value from a relatively generous 1.8 cents apiece to a puny .03 cents.

To get the maximum bang for your plastic buck, you’ll need to know the tricks for how to use your card and, once it’s time to cash in, how to spend the points you’ve racked up. If you’ve chosen the right rewards program and you spend the points correctly, the 20,000 points you racked up this year could be worth $360. Make the wrong choices and those same points could be worth $60 ... or even zilch. Our related story shows you the 5 best ways to redeem rewards. Here are the six worst ways:

1. Overpay for Catalog Products

Those Sky Mall-like rewards catalogs filled with everything from vacuum bags to iPods look tempting. But you could be overpaying wildly by using your points. “It gets very difficult to quantify how getting X points for an item converts to dollars,” says Ken Paterson, vice president of research operations for Mercator Advisory Group, a research and consulting firm focusing on the payments and banking industry.

You could, for example, redeem 10,000 American Express Membership Rewards points for a four-piece Pyrex set whose look-alike sells for $47 on Amazon.com. That’s a lousy deal, considering that the average value of an AmEx point is about a penny, according to credit-card analysis site PlasticIQ.com.

Before redeeming with a rewards catalog, search online for the price of the item and see whether your point conversion is a decent deal.

2. Delay Booking Flights on Miles

Getting where you want to go with reward miles isn’t just tricky; it can also get increasingly expensive. Card issuers love to quietly jack up the mileage conversion values for flights over time, raising the cost of the flights. “Those tickets to Hawaii might go from requiring 40,000 points to 50,000 points over time,” says Brian Riley, research director at TowerGroup, a financial services advisory firm.

So if you’ve racked up miles, use them as soon as you can on domestic flights, before the airline’s program changes, rather than holding out until you’ve amassed the massive number of points needed for a free international flight. To help redeem rewards quickly, if you’re shy the necessary points for a flight you plan to book, try a points-trading site such as Points.com. You might be able to exchange points you don’t need from another card for mileage points someone else at the site has for your airline. Points.com charges a 1-cent-per-mile fee to trade, so it’s best if you’re less than 10,000 miles short of your ticket.

3. Pay a Steep Annual Fee

Carry a card with an annual fee of $50 or more and you may accumulate rewards faster than with a no-fee card. But unless you’re really racking up the points, the cost is likely to exceed the value of the extra points. Many issuers offer a no-fee card and a card with an annual fee that’s a bit more generous with rewards — and in most cases you’re better off going with the free card.

4. Fail to Qualify for Your Card’s Rewards

Some cards only dole out their biggest rewards to serious chargers. For instance, the Chase RealCash Debit Card requires that cardholders spend $1,000 a month to earn the maximum 3 percent cash back on purchases. (There’s also a $25 annual fee.) Other cards limit rewards to spending at particular types of stores or specific chains.

Some companies rotate their best rewards quarterly. The Discover More Card, for example, is offering a 5 percent cash-back bonus on up to $300 in purchases on gas, hotels, movies, and theme parks from July 1 through September 30. Planning to take a Columbus Day road trip through New England to see the foliage? Too bad. You’ll only get 1 percent back when you fill up at the pump.

5. Buy an ‘Experience’

How’d you like a “free” trip to the Indy 500, or a week at a Wyoming dude ranch? Some card issuers let you cash in points for outings like those or hard-to-get tickets.

Occasionally, the point programs may work out for you. For instance, run up 15,000 Bank of America WorldPoints (valued at about $150) and you can snag two Chicago Cubs box seats and a catered pre-game meal. The two game tickets alone are worth $96, and the meal could easily run $40 apiece, so this is a decent deal.

But as a general rule, unless it’s an experience money really can’t buy, you’ll usually get a better deal — and a better ability to tailor the experience your way — by paying cash.

6. Make a Late Credit Card Payment (Even One)

Because the credit card reform law largely ignored rewards programs, it’s one area where credit card issuers can still turn the screws.

American Express changed the fine print on its Blue and Blue Sky cards, for instance, and now, if you accidentally make a late payment, you’ll forfeit all the points you would have accrued during that billing cycle. (You can buy them back for a $29 fee, but that wouldn’t be wise unless you had more than 2,900 points at stake.) If you’re 60 days late on a Discover More card payment, you could watch your accumulated Cashback Bonus vanish along with your excellent credit score.

If you do accidentally miss a payment, call your card issuer to negotiate keeping your points. Then sign up for automatic bill-pay or monthly online reminders so it won’t happen again.

5 Best Ways to Get Credit Card Rewards

by Melody Warnick | Jul 15, 2010

If you upended your wallet or purse, how many rewards cards would spill out? Rewards cards are now so ubiquitous that their points have passed the U.S. dollar as the largest currency in the world, with more than a trillion points in circulation, according to Affinion Loyalty Group, a marketing company that manages rewards programs. And the number of airline miles is beyond sky-high: 14.2 trillion.

Sure, a reward point isn’t exactly worth a dollar — its cash value is more like a couple of pennies or less. But we still can’t seem to resist the promise of freebies: “Having a way to make your everyday purchases reward you in real dollars, gift cards, merchandise, or travel is incredibly compelling,” says Marti Beller, president of Affinion.

Card issuers, however, are making rewards harder to collect. BillShrink.com can help; the site analyzes your spending habits and recommends the most appropriate rewards cards. And to ensure you’re getting the most bang for your bucks when you redeem points, follow these five rewards card rules (and see our related story on the worst ways to redeem rewards).

1. Get Your Rewards in Cash

Transferring points into spending money is the way 61 percent of the card owners get their rewards, because they know exactly what they’re receiving. But some cash rewards have become complicated.

“It used to be you got 5 percent cash back across the board,” says Beverly Blair Harzog, a spokeswoman for CardRatings.com. “Now card issuers have rotating categories where you might get rewards for gas in the first quarter of the year and groceries in the second.”

To keep things simple, consider these cash-back cards:

• American Express’s Blue Cash card, recommended by Consumer Reports. It pays you 1 percent back on up to $6,500 in annual spending at supermarkets, drugstores, and gas stations; 5 percent when your spending exceeds that threshold.
• Capital One’s No Hassle Cash Rewards card pays 2 percent cash back on gas and groceries; 1 percent on everything else.
• Pentagon Federal Credit Union’s Visa Platinum Cashback Rewards card offers 5 percent back at gas stations, 2 percent at supermarkets and 1 percent on everything else, though you need to qualify as a member of the PenFed credit union.

2. For Travel Points, Get a Flexible Card

There are three problems with many travel rewards programs: blackout dates that make points hard to redeem, tacked-on fees for cashing in, and an inadequate supply of seats available for reward travel. So unless you’re especially loyal to one airline or hotel chain, opt for a travel card with the flexibility to earn points from multiple airlines and hotels.

A good bet: Capital One’s VentureOne Rewards Visa. This no-annual-fee card lets you accumulate 1.25 miles for every dollar you spend on any purchase, then redeem them on any flight (no blackout dates), hotel, or car rental. That’s a better conversion rate than you’d get with many airline-specific cards.

To avoid losing travel rewards due to the card’s expiration date (often five years) or losing value on them if your issuer gets stingier, redeem your points early and often.

3. Buy a Gift Card

First, the bad news: Redeeming points for gift cards from retailers such as Best Buy, Crate and Barrel, and Bath and Body Works limits your redemption choices and sticks you with all the drawbacks of gift cards. So always take cash instead of a gift card if it’s an option.

But if your only other choice is to swap points for merchandise from a card issuer’s catalog, gift cards are usually a better bet, since you’ll know the price you’re paying, plus you’re less likely to blow the money on something you don’t really need. What’s more, you can redeem small amounts of points — say, 2,500 points for a $25 gift card with the Chase Sapphire card — or a quick payoff. It’s not as if you could fly very far on those 2,500 points.

4. Get Cards from Stores You Frequent

Using a co-branded card bearing the logo of a particular retailer or e-tailer can pay off big time. “Merchant-based rewards are typically much more generous than others,” says Brian Riley, research director at TowerGroup, a financial services research and advisory firm.

With a co-branded card, your points might be worth up to 1.8 cents each, compared to 1.1 cents for a travel card’s points. If you’re redeeming 15,000 points, that’s the difference between a $270 reward and a $165 one.

Chase’s Amazon.com Rewards Visa card, for instance, offers 1 to 2 points for every dollar spent on everyday purchases, but 3 points for purchases at Amazon. You also get a $30 credit for signing up.

5. Use Points to Reach Financial Goals

To boost your rewards-card ROI, get a card that automatically deposits cash back into your savings or investment account or into a 529 college fund.

With a Fidelity Rewards American Express Card, for example, you earn two points for every dollar you spend. Once you hit 5,000 points ($2,500 in purchases), your rewards are converted into dollars at a 1 percent rate (so 5,000 points = a $50 deposit) and deposited into your Fidelity IRA or 529 account. Fidelity manages 529s for Arizona, California, Delaware, Massachusetts and New Hampshire, but you can also choose its UNIQUE college investing plan for residents of any state.