Chapter 5: Credit Card Rewards

Selecting the right card

Start with a strategy to select the right card. Will you use the card for every purchase, from gas to vacations, to get the most cash possible, or will you use the card sparingly and to have access to extra cash as a nice bonus?

Choose a card based on the amount that you charge each year. If you charge over $10,000 a year, then look for a card with no maximum spending limit or cap on the amount of cash you receive each year. Some cards offer tiered pricing that benefits heavy users. Blue Cash from American Express is one of the better offers for people charging $40,000 to $50,000 per year. If you charge less than $6,500 per year, the rebate is only 0.5% on general purchases and 1% on everyday purchases. Charge over $6,500 and the rebate increases to 1.5% on general purchases and 5% on everyday purchases. The spending limit is $50,000 but spending that much earns $685 in cash.

If you put all of your spending on your credit card and pay it off each month, you can take this to another level by maximizing your rebate on one card and then switching to a second cash reward card.

If you selectively use credit cards, look for a card with the highest rebate starting with your first purchase. However, if it takes you more than two years to earn a significant reward, then the card may not be a good choice. The chance always exists that the rewards program may change or end before you redeem any points.

Moreover, select a card with no annual fee. Some cards waive the annual fee during the first year then charge a fee that is typically $35 to $40. Avoid cards with annual fees because you will have to spend $3,500 each year to just cover the fee.

Even though rewards are exciting, many consumers don’t use them. A national GMAC Mortgage survey concluded that while over 50% of respondents in a recent national survey of American consumers reported having at least one or two credit cards that offer rewards, more than 41% of such reward cardholders either rarely or never bother to use their rewards. The results also indicate that traditional rewards programs, such as airline miles, are losing steam, as only 13% of all respondents in the survey ranked airline miles as valuable. If left unused and inactive, some points and miles can expire after 18 months.

Cash-back reward cards

Receiving cash back for purchases sounds like a good idea, but the trick is finding the card that will provide the most cash for specific credit card usage. Cash back cards are a nice perk for cardholders with very good credit who pay off their balances each month. Cardholders who carry a balance at least several times a year should focus on cards with the lowest rates, not cards with rewards.

Other rewards may sound more exciting, but beating a cash-back card is difficult. The rewards are straightforward and you may use the cash you earn for anything, including paying down other debt. You can redeem cash rewards in smaller increments instead of waiting two years to earn enough points for a free airline ticket.

A variety of cash-back cards are available, but the rebate for most cards is 1% for general purchases and 5% on purchases made at standalone grocery stores, drugstores, and gas stations. Some card issuers will increase your reward if you redeem them for gift cards with their retail/restaurant partners or for purchases made through their online shopping site.

Redeeming cash rewards varies by company. Most disclose reward distributions in their terms and conditions. Do not assume that they automatically send you a check each time you reach a point level. Some companies require that you pay attention to your statement and request your rewards. Some apply the cash you earn as a credit to your account balance. If you don’t pay attention and don’t request cash rewards, they may eventually expire or you may forfeit them if you close the account.

Although cash-back cards seem like easy money for users, credit card companies profit from them as well. Their goal is to convert consumers to use cards for every purchase. Even if they do not make money from cardholder fees or interest, they make money on the merchant fees. The merchants pay a fee to the credit card company for each swipe of a card.

Airline rewards cards

Before you consider an airline reward card, understand that these have some of the highest rates. Even if you have good credit, a low rate is around 13%. Most rates for many airline cards starts at 16% to 18%. If you do not pay off your balance each month, do not even consider an airline reward card.

Some airline reward cards charge an annual fee, somewhere between $39 and $125. If you don’t charge a significant amount on your card, this annual fee can wipe out any rewards that you earn since most airlines require 25,000 points for a free ticket.

There are two types of airline rewards: those affiliated with a specific airline and general airline reward cards with miles that you can redeem on most carriers. The cards with the most generous airline rewards and bonuses, like Citi PremierePass and Capital One No Hassle Miles, are not tied to a specific airline and give you flexibility because you can use the miles for other rewards. Some cards, like Capital One and Discover, do not charge an annual fee. The problem is that you can’t combine the miles earned from these cards with the miles in your frequent flier account.

Maximizing your points

Specific airline cards, such as Citi AAdvantage, Worldperks Visa/Mastercard, and Jetblue from American Express, are good choices for people who frequently fly these airlines. Combine them with your frequent flier account to quickly increase your earned mileage and free tickets. Many airline cards offer generous bonus miles with the first purchase, bonus miles if you purchase a ticket with your card, and large discounts for companion tickets.

If you are a heavy credit card user, also consider the maximum awards per year. Annual limits start as low as 60,000 miles. If your annual mileage limit is 60,000, but you charge 75,000 miles on your card, you are not earning as many miles as possible.

There are a few ways to accelerate point accumulation. If you typically travel exclusively on one airline, join its frequent flier program and get the credit card affiliated with that airline to add the reward points to your frequent flier account. Since most frequent flier programs offer promotions and discounted flights to their members, regularly check the airline’s Web site. Also look at their partner programs such as rental cars and hotels. Using these regularly can provide you with a significant boost in miles earned.

Are airline miles a good choice?

While free airline tickets are more exciting than other rewards, they are also harder to earn. Typically, 25,000 points earns one plane ticket. Since airlines are providing fewer flights and fewer available seats, booking your flights six months to 330 days before you travel is a good idea. If you are just starting with an airline card, you may wait long to earn and actually use your miles. However, as ticket prices increase, a free ticket can save a great deal of money.

If you typically take short flights, focus on a card with hotel or entertainment rewards. If your airport has several competitors or you only take short flights, chances are you will save money shopping for a cheap flight and using your rewards for a nice hotel.

Watch your miles and rewards offers

If you have several frequent flier accounts but no idea how many miles you have accumulated, it is time to review your accounts. Many airlines are shortening expiration periods for inactive frequent flier accounts; if you don’t use your miles, you may lose them. For example, in January 2007, US Airways cut their activity period from 36 months to 18 months.

These changes in frequent flier mileage programs further underscores the decrease in overall rewards programs taking place in a number of industries. From 2006 to 2007, credit card companies found ways to make subtle cutbacks in reward policies, making it more difficult for consumers to reap the benefits they once enjoyed. Hotels require more points to qualify for a free room, American Express cut its reward points in half for everyday purchases, and Citi reduced the cash-back rewards on one of its cards. Consumers need to be aware that many reward programs are tightening up their terms and redeeming these benefits may get more difficult.

If you are close to losing your miles or points, here are some ways to show activity in your account:

  • Fly on the airline or one of its partners.
  • Purchase something from one of its retail partners. You can find items to purchase on the airline’s Web site (make sure you purchase through the Web site to get the credit).
  • If you aren’t realistically close to 25,000 miles for a free ticket, use the miles for a hotel room or merchandise.
  • Transfer your miles to another frequent flier member.

The airlines may allow you to reactivate your account for a fee. Most charge you by the mile plus a transaction fee. Unless you are very close to a free ticket, this is not worth it.

What is a mile worth?

Before you get excited about a “free” ticket, do a little math to determine the true mileage needed for an award and whether you should use cash or miles for that ticket. Industry experts generally value each frequent flier mile at between 1.5 and 2 cents. If you cash in your miles for low-priced tickets, your frequent flier miles may be worth just a fraction of a penny.

Before using your miles, read the fine print for additional fees. Just because you use your miles for a ticket, you still may have to pay fees. Chase charges a service fee of up to $25 for the use of its reward headquarters services for redemption of air travel.

Here’s how to calculate whether this flight is worth your frequent flier miles:

Determine the number of miles you will actually fly then add this to the number of miles needed to claim an award. One mile is worth approximately one cent.

For example, if you are flying from Chicago to Nashville direct on American, you will fly approximately 1,000 air miles, round trip. You will receive 1,000 frequent flier miles by purchasing the ticket. Factor in the frequent flier miles lost and the true award cost for that ticket would be 26,000 miles.

26,000 miles x .01 (1 cent per mile) = ticket value of $260

The air miles are a good deal if the ticket you purchase costs $260 or more.

Comparing Airline Mileage Rewards

The following tables compare the mileage awards for several popular airlines.

American Airlines
Standard Award Levels Miles Needed
Domestic round-trip, economy class 25,000
Hawaii Mile SAAver 35,000–70,000
Europe Mile SAAver 40,000–60,000

Link to full awards chart »

United Airlines
Standard Award Levels Miles Needed
Domestic round-trip, economy class 50,000
Hawaii 70,000
Europe 100,000

Link to Standard Awards chart »

Continental OnePass
Standard Award Levels Miles Needed
Domestic round trip, Saturday night stay economy class 25,000
Domestic round trip, economy class 50,000
Hawaii standard round trip 35,000
Europe standard round trip 50,000

Link to OnePass awards chart »

Delta Skymiles
Standard Award Levels Miles Needed
SkySaver Domestic round trip, economy class 25,000–45,000
SkySaver Hawaii, economy class 35,000–75,000
SkySaver Europe 50,000–90,000

Link to airline awards mileage chart »

Look at flights on partner airlines

If you are having trouble getting seats using frequent flier miles with your designated airline, check out your options with its airline partners. Code-share agreements allow airlines to sell tickets on flights operated by a partner airline. These airline partners typically have reciprocal frequent flier agreements, allowing travelers to earn and redeem miles on each other’s flights and to still use those miles for travel on a code-share partner. Since airlines may not volunteer this information, you have to do the research for this on your own.

Hidden fees for redeeming miles

Dig into the terms and conditions to find these “hidden fees.” This is from American Express:

“For each conversion of points into the Frequent Flier program of a U.S. airline, a fee of $0.0004 per point, with a maximum fee of $50, will be charged to your Card account. We charge this fee to offset the federal excise tax we must pay on such conversions. The fee may be more or less than the actual amount of the excise tax we pay on any individual conversion. We may offer you the option to redeem points to pay this fee.”

Chase charges a $25 service fee to redeem points for travel.

Hotel vs. airline rewards

Hotel cards may actually be a better choice than airline rewards, and they offer more flexibility. Using your frequent flier miles to get the exact flight that you want has become more difficult, but using your points to book a free hotel room has become much easier.

Hotel reward cards are the fastest way to get a free hotel stay. They are more generous with bonus points and points for hotel-related purchases. The Hilton HHonors card offers 10,000 bonus points after you make your first purchase, which is almost two free nights. The Starwood card from American Express also offers 10,000 bonus points after the first purchase, as well as free nights in its lowest tier for 2,000 points per night. The Starwood Starpoints also offers the fifth night free for upper-tier hotels like the Walt Disney World Swan and Dolphins hotels, the Sheraton Waikiki, and the Sheraton Manhattan Hotel.

Another advantage of hotel cards is flexibility. Hotel chains offering loyalty cards have standard to upscale hotels everywhere. Using your points on the hotel that fits your travel plans is usually easier than finding the flight that fits your schedule. If you want to use your points to book a flight, most hotel reward cards can transfer your points into your frequent flier account (before you do this, find out the exchange rate).

You can save just as much money using your rewards for hotel rooms instead of a plane ticket, especially if you stay at a nicer hotel. While you may have to use 25,000 miles to get one airline ticket, that same number of points can get your family a free room for several nights at a nice hotel. You may also use these points for room upgrades, spa time, etc.

Hotel reward cards may be your best reward choice if you are a frequent traveler. Think about where you want to go, and make sure your hotel or one of its partners operates in that location. The rewards will not help you if they don’t have property at your destination.

If you can’t narrow your choice down to one hotel chain, an American Express Membership Rewards card may be good for you. You can redeem points for travel certificates for Hyatt Hotels, Marriott International, Omni Hotels, Fairmont Hotels and Resorts, Preferred Hotel Group, Loews Hotels, and Radisson Hotels and Resorts. Program hotel partners currently include Priority Club Rewards (InterContinental Hotels and Resorts, Crowne Plaza Hotels and Resorts, Holiday Inn Hotels and Resorts, Holiday Inn Express, Staybridge Suites, Candlewood Suites, and Hotel Indigo) and Hilton HHonors Program (the Hilton Family of Hotels: Hilton, Conrad Hotels and Resorts, Doubletree, Embassy Suites Hotels, Hampton Inn, Hampton Inn & Suites, Hilton Garden Inn, Homewood Suites by Hilton, Scandic, and the Waldorf Astoria Collection).

Problems with reward cards

If used correctly, you can get nice perks for using a reward card. However, issuers are not like Santa Claus and they do not give rewards out of kindness. The credit card industry is a business and offering rewards is another part of the strategy to obtain as many cardholders as possible and to make as much money as possible from each cardholder.

Reward cards may have high annual fees. In some cases, the better the rewards, the higher the fees. For example, the exclusive American Express Centurian card carries an annual fee of $2,500. Most of us do not need a card with an annual fee because many good reward cards exist that do not charge an annual fee.

Just because you earn the reward does not mean that it automatically comes to you. Redemption terms may also be complicated, making redeeming your reward difficult. Issuers also have the right to change the terms at any time, making claiming your reward more difficult, even if it is just a credit on your bill. Often, you have to call and ask for your reward. Rewards my expire if there is no account activity in as little as 18 months. Rewards may be frozen or canceled if you go over the credit limit or pay your bill late.

You will probably spend more with a reward card. The average monthly spending on a credit card with no rewards program is $465. That figure increases to $890 (Nilson Report) for a rewards card. We get caught up using our reward cards for purchases to accumulate more points, and we end up purchasing items that we may not have purchased with cash. According to Dun & Bradstreet, consumers spend 12% to 18% more when using credit cards than when using cash.

The advertised rate in the promotion may not be exactly what you get. Credit card companies offering 5% cash back on purchases usually have restrictions. Cards such as Blue Cash from American Express offer 5% cash back, but you must spend over $6,500 to get this. The Chase Business Cash Rewards card advertises up to 5% cash back, but this is limited to only a small percentage of spending.

Issuers are turning away from the straight 1% or 5% rewards that were easy to understand and calculate. Many cards now have tiers and conditions, and some cards, such as Chase Freedom, now determine rewards based on an individual’s spending habits. The goal here is to encourage consumers to use the card to pay for a wider variety of purchases, ranging from dry cleaning and utilities to cell phone bills.

In 2006, GMAC Mortgage announced the results of a national survey of 3,000 Americans conduction by Harris Interactive, a market research firm acting on behalf of GMAC Mortgage. Over 50% of the respondents reported having at least one or two rewards credit cards, but 41% of these reward cardholders either rarely or never bother to use their rewards. The results also indicated that traditional rewards programs, such as airline miles, were less popular, as only 13% of all respondents in the survey ranked airline miles as valuable.

The GMAC Mortgage survey also revealed that nearly one in four rewards cardholders said that they would use the rewards more often if redeeming points was easier. Seven percent of rewards cardholders categorized the value of their credit card rewards as worthless and did not even bother with them.