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After a year of anemic credit card offers, credit card deals are back. Credit card companies have stepped up marketing efforts to woe the most desired segment of cardholders: people with good or excellent credit.
Rewards credit cards are at the forefront of the new generation of credit card offers. However, before you fall for that great new rewards credit card deal, look before you leap. While card issuers have sweetened rewards, they have also put in place new tricks and traps, which could easily cost you more than you earn. Here are five tips to navigating rewards credit cards in the new credit card era.
1. Watch Out for Rewards Expiration Clauses. Most rewards cards come with limitations on when and how cardholders must redeem points, and rewards expiration clauses are becoming more common. For example, Bank of America and Citigroup rewards cards often allow five years for point redemption, after which the rewards balance drops to zero.
How to Avoid: For new credit card applications, look for rewards credit cards without expiration clauses. The points earned on Capital One’s “No Hassle” or Venture rewards cards, for example, never expire. (However, if the account is closed, you will lose any unused rewards earnings.) Check your existing rewards credit card for expiration clauses and memorize the terms and conditions to avoid nasty surprises down the road.
2. Check for inactivity restrictions. Consumers who don’t plan on using their rewards cards regularly should scan programs for inactivity restrictions. Several rewards credit cards have introduced terms, which allow the card issuer to rescind points after extended periods of dormancy. For example, Discover Card zeroes out rewards on cards that have gone unused for 18 months in a row. Airline frequent flier programs have adopted similar policies; so even miles earned on a frequent flier card could expire after a certain period of time, in many cases after as little as 18 months.
How to Avoid: For rewards credit cards not used regularly, check with your card issuer whether the card has any inactivity restrictions. In addition, check the terms of any frequent flier programs to make sure you know if and when miles earnings expire.
3. Avoid reinstatement fee traps. Consumers who fail to pay their credit card bills on time might have to pay a reinstatement fee to get rewards earnings. Credit card companies have different policies when it comes to rewards-related penalties, however, most exact some price for consumers who pay late. Sometimes as little as one late payment is enough to trigger the fee.
Discover will zero out points on cards that haven’t received payments for two months in a row. American Express cardholders, who pay their bills late, must pay a $29 reinstatement fee to get that month’s rewards earnings transferred to the loyalty accounts of credit cards cobranded with Delta Air Lines, JetBlue, Hilton Hotels and Starwood Hotels. The same rule applies for other Amex rewards cards.
How to Avoid: To avoid slip-ups, synchronize credit card payments, so that all credit cards come due at the same time of the month, preferably just after you get paid. Should you still miss a payment, keep in mind that the $29 reinstatement fee means that you’ll only earn money after the first $2,900 in charges—so you may be better off forgoing the rewards for that month. If the issue is not having enough money to make the minimum monthly payment, you’d save more money using a low interest credit card (see point 5).
4. Avoid costly rewards credit cards. While most rewards credit cards used to come without an annual fee, many now charge fees between $50 to as high as $450 for e.g. the American Express Platinum rewards credit cards.
How to Avoid: There are plenty of good rewards credit card deals to be had without an annual fee, so spend a little time comparing rewards credit card offers. If you still prefer a card with an annual fee, make sure that your annual spending will make it worth the fee. On average, rewards earnings are worth one cent to the dollar. So for example, if a card’s annual fee weighs in at $75 per year, you won’t start earning rewards until after the first $7,500 in charges.
5. Avoid interest rate traps. Card issuers are able to offer lucrative rewards programs for one simple reason: they make cardholders pay for them. Rewards credit cards typically come with considerably higher interest rates, as much as 5 to 8 percentage points higher. Unfortunately, enough consumers fall for this trap to make rewards credit cards a very worthwhile venture for card issuers. Don’t be one of them.
How to Avoid: Remember the basic rule of rewards credit cards: never carry a balance. Paying premium interest on rewards credit card balances will cancel out any potential rewards earnings. If you have to carry a balance, consider a two-card plan: keep the balance on a low interest credit card, and use a separate rewards card for charges that you plan to pay off in full each month.
