Editorial Policy

6 ways rewards cards can change your life (for good or bad)

Rachel Hartman

October 9, 2014

It may be a small piece of plastic, but its effects can be dramatic.

Think first-class roundtrip tickets to Asia, cash back in the four figures annually and free hotel stays. Or, at the other extreme, high interest charges and whopping annual fees.

Meet the rewards card. While this type of card often offers cash-back features, travel perks or points for purchases, the impact it can have on your wallet and lifestyle varies significantly.

When can a rewards card work for you in a big way and when can it drag you down?

1. It could make it hard to get rid of debt.

Compared to other types of credit cards, rewards cards tend to have a little higher interest rate, notes Ben Woolsey, president and general manager of CreditCardForum.com.

[Check out our exclusive G+ Hangout with CreditCardForum.com's Ben Woolsey, where he talks to CCG Editor-at-large Erica Sandberg about how to maximize your rewards card over the holidays. #RewardsCardsCCG]

Also: “The cost of interest generally offsets rewards you might earn,” he explains. So, if you carry a balance from month to month, you won't come out ahead.

For lingering balances that will take some time to work down, a better option would be a low-interest credit card — even if it doesn't offer additional perks.

2. It could break your budget.

Since it evokes the idea of receiving cash, miles or points every time you swipe the card, a rewards card can lead to spending more than planned.

You might convince yourself that you are getting reimbursed for your spending, notes Woolsey, when in fact, you are incurring high costs in interest rates when you carry over a balance, not to mention running the risk of charging more than you can afford to pay off in a timely manner.

With a focus on the rewards — rather than the actual dollar amount you're spending — charges can add up fast.

3. You could get hit up with big fees.

Many rewards cards come with attractive sign-up bonuses, such as earning 20,000 miles if you spend $3,000 in the first three months. Some cards also waive the annual fee for the first year, but then charge the fee the following year.

If you don't use the card and don't cancel it, you'll still have to pay the fee every 12 months. If you're not getting many — or any — rewards from the card, that annual charge might not be worth it.

But before cancelling a card, take a hard look at all of its benefits. For instance, some of the Chase hotel cards give you one or two free nights each anniversary, notes Matilda Geroulis, cofounder of TheTravelSisters.com, a site specializing in strategies to earn miles and points for travel. “This can be used at a hotel that is much more expensive than the fee,” she explains.

4. It can get you cash — and plenty of it.

When it comes to reward choices, cash back is often a crowd pleaser in the credit world.

“What you earn is probably the most transparent in terms of value you get back,” says Woolsey. At the base level, you can usually expect to earn 1 percent cash back. So, if you spend $500, you can plan on getting $5 back. Many cards offer higher percentages back, such as 2, 3 or 5 percent for certain categories or purchases.

If you set up a system, the cash can be significant. Clear Charity cofounder J. Perez-Kim said that in 2013, he and his wife received more than $2,000 cash back on just day-to-day household spending.

Since some cards pay a higher percentage in cash back for certain categories, Perez-Kim and his wife keep reminder cards in their wallets. This reminder card includes a chart that spells out which rewards card to use for different situations. Their setup helps them get higher levels of cash back from daily expenses such as gas, groceries, pharmacy purchases and restaurants.

5. It might open a whole new world of travel.

“Ultimately, there's a lot more value in points and miles programs, but it requires more strategy and research,” explains Woolsey.

You'll want to start with a credit card that offers a hefty sign-up bonus. Then you'll need to be on the lookout to get points or miles to use toward future flights, hotels or car rentals.

To make the most of the card, “take advantage of spending categories that offer more points,” suggests Geroulis. “Some cards have revolving 5 percent categories every quarter.” If you watch carefully, you can follow these deals to rack up points or miles. But if keeping track of rotating categories sounds like too much work, then you're most likely better off with a card that has a simpler rewards program.

6. It can help you set — and reach — big goals.

Geroulis and her sister set a goal in 2012 to earn enough miles to fly first class to Asia the following year. By using credit cards and strategies to accumulate miles, the two reached their goal in 2013. They also helped their mother get a credit card and earn miles to fly to Europe.

The benefit of setting a goal, whether it's to maximize your cash-back benefits or to earn a free trip, is that it helps you focus on your credit card use and rewards.

For travel goals, think long term. By planning a year or two ahead, you'll have enough time to map out a trip, make arrangements, and rack up enough miles and points to get some or all of your trip paid for in advance.