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How to Navigate the Rewards Card Maze

 
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July 18, 2012
Ask Eva
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QHi Eva,

I'm looking at rewards cards and what I can use them for. I keep seeing stuff about how I can redeem points for cash, check or direct deposit (instead of travel or merchandise). Is getting cash-back a good deal? Or am I better off booking airfare or getting a TV in the card company's online store? Thanks for your help. – Colin

AHi Colin,

It is indeed confusing to navigate the rewards credit card maze, but the good news is that you're asking all the right questions.

Since you're just starting out, you're right about focusing on getting a cash-back credit card. Cash-back cards are like the workhorses of rewards cards. Many deliver great value. Plus, as long as you choose the right card, they also tend to be low maintenance — you don't have to spend a lot of time staying on top of all the rewards terms or finding the best redemption options.Ask Eva

Cash-back credit cards differ, however, when it comes to how lucrative and user-friendly they are. Here are some questions to ask yourself before making your decision.

1. How easy is it to redeem earnings?
You mentioned that the cards you are looking at have different redemption terms — direct deposit, cash or check. Some cards, like the American Express Blue Cash cards or the Capital One Cash Rewards card will give you a simple statement credit. Others make you jump through hoops, requiring that you go online to redeem earnings for gift cards from a selection of retail partners. This forces you to spend money to get your cash-back earnings, which really defeats the purpose of getting the cash-back rebate in the first place.

2. What are the cash-back earnings?
It's easy to get sidetracked by sign-up bonus offers when shopping for rewards cards. However, the main thing that counts for a cash-back card is the cash-back percentage you'll earn on the card.

Be cautious, however, with cards that advertise a high cash-back rate, but only on certain types of purchases at certain times of the year. Generally speaking, if you have only one rewards card, you're better off with one that offers the same fixed cash-back rate all year long.

In addition, avoid cards with tiered rewards structures, which require a certain spending level each year before higher cash-back rates kick in.

3. What is the cash-back redemption value?
Just as rewards point earning rates differ, so does the points' redemption value. And, for some cards, that means you'll get less bang for your buck when redeeming points for cash-back. For example, the Capital One Venture card lets you earn a generous 2 points per dollar on all spending — but the value of those points differs depending on how you redeem them. If you use the points to get reimbursement for airfare purchased with the Capital One Venture card, the points are worth the equivalent of 2 percent cash-back. However, if you use them for a cash-back statement credit, the points are worth only the equivalent of 1 percent cash-back.

Unfortunately, it's not always easy to figure out how much the redemption value is, as these terms aren't always disclosed in a card's advertising. Generally speaking, if certain card terms aren't transparent, it's usually a warning sign that the terms aren't that great. If they were, card issuers would be out there highlighting them to attract customers.

4. Is there an annual fee, and if so, is the card worth it?
It's easy to find a cash-back card without an annual fee. However, if your spending hits a certain yearly threshold, getting a card with an annual fee can sometimes be worth it.  The Amex Blue Cash Preferred card, for example, features a $75 annual fee, but cardholders get 6 percent cash-back on groceries, 3 percent on gas and 1 percent on all other purchases. That's better than most cash -back cards, including the no-fee Blue Cash Everyday card, which offers 3 percent on groceries, 2 percent on gas and 1 percent on all other purchases.

How quickly would you earn back the $75 annual fee? Well, with the extra 3 percent on grocery purchases, you earn an additional $30 cash-back for every $1,000 in purchases. So once you've spent $2,500 on groceries, you've earned $75 in cash-back and broken even. If you will hit that threshold within three to six months each year, you'll easily come out ahead. If not, stick with a card that doesn't charge an annual fee.

Got a question for Eva? Send her an email.


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