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Beware: 8 credit card rewards redemption gotchas

Allie Johnson

January 23, 2014

Cha-ching! Do you think of your credit card rewards as money in the bank, just waiting to be cashed in for a plane ticket, a luxury hotel stay or a wad of cash? If so, watch out: The fine print can foil your plans.

To avoid nasty rewards redemption surprises, learn the ins and outs of how your credit card rewards program works.

“You want to make sure you get the rewards you have coming to you, and get the most bang for your buck,” says Joe Valenti, director of asset building for the Center for American Progress.

Here are eight common rewards “gotchas” you might trip over — and how to break through them to claim your rewards.

Gotcha No. 1: You get extra cash back in rotating categories, but only if you sign up ahead of time. Some cards, such as Chase Freedom and Discover “it,” offer what sounds like a sweet deal: 5 percent cash back in rotating categories such as home improvement stores, restaurants or gas. But getting the higher percentage isn't as simple as just pulling out your card at the right retailer or restaurant;  you have to sign up each time the category changes.

So find a way to remind yourself — which you might be able to do via the card issuer's website, says Lance Cothern, a CPA and blogger at Money, Life and More.

“Request text or email alerts, and Chase will actually tell you when it's time to sign up,” he says.

Gotcha No. 2: Oh, and by the way, there's a dollar limit on that category. Cards with rotating categories typically cap the dollar amount at which you can earn the extra rewards. After you spend the set amount, your rate drops back down, usually to the regular rate offered for all purchases.

For example, Discover typically caps spending in its seasonal 5 percent categories (which include everything from online shopping to home improvement stores) at $1,500. After you've spent that much, you earn 1 percent back.

That's still a not-too-shoddy $75 back per quarter if you fully maximize these categories, but don't get your hopes up about earning hundreds back on your expensive home remodeling project. The card issuers would “go broke” if they offered an unlimited 5 percent back on big-ticket categories, says Rob Berger, founder of personal finance blog The Dough Roller.

Gotcha No. 3: Redeem your rewards the wrong way, and they'll be worth less. Log in to your account, and you may start seeing offers for electronics and other merchandise you can pay for with points. Yet, redeeming your points this way may not be as lucrative as you thought, as the price you pay can get lost in the conversion. In other words, you could end up trading in a cache of points that would be worth $400 in travel rewards for an iPad Mini that costs just over $300 on Amazon.

“But some people don't even notice,” Berger says.

So, before you redeem, run the numbers. With some cards, such as the Capital One Venture card, you get maximum value (1 cent per point) if you redeem for travel, Berger says. Things get murkier, however, if you redeem for merchandise, events or experiences.

“On some cards, you have to redeem in a very specific way to get the full value,” Cothern says.

Gotcha No. 4: Use your points or lose them. With some cards, you lose your rewards if there's no activity on the rewards account for a certain time period. This is common with airline rewards programs, which generally require activity at least every year or two.

“If you're just hoarding rewards with no plans for them, I'd suggest getting them out of the program,” Cothern says.

Even though miles can expire, it's relatively easy to keep them active. Just swiping your rewards card will usually do the trick. You can also keep your rewards balance active by redeeming points, or using your card's online shopping portal or dining program.

Berger recommends using a service like AwardWallet.com, which will help you keep track of rewards, including expiration dates.

Gotcha No. 5: Sorry, you can't use your miles to pay for that flight. You try to get a plane ticket for that beach vacation, but it's a no go. Blackout dates and limits on the number of seats that can be purchased with rewards can make it hard to book a flight with miles, Cothern says.  Even if your program touts “no blackout dates,” certain in-demand dates may require so many points that it may as well be a blackout date, as far as you're concerned.

Cothern recommends getting the lowdown on various airlines' frequent flier programs before committing to a co-branded card affiliated with an airline. In addition, be sure to plan ahead if you want to use rewards for seat upgrades on international flights.

“Long-distance luxury seats sell out first because that's what a lot of people want,” he says.

Gotcha No. 6: Sorry, you don't have enough rewards to cash in yet. Some cards won't let you use your rewards to make a partial payment, Berger says. For example, the Capital One Venture card offers a feature called Purchase Eraser, in which you can make charges for past travel disappear. The catch? You need to have enough points to cover the full charge for, say, a hotel stay or a rental car bill. One workaround Berger uses: He pays for $10 subway cards using Purchase Eraser in order to redeem a small number of leftover points. With some other credit cards, you can only redeem cash-back rewards in certain increments — for example, 2,500 points, Cothern says.

“That surprised me the first time I ever got caught by it,” he says.

Gotcha No. 7: Pay your bill or kiss your rewards goodbye. Missed a credit card payment? If so, you might want to check your credit card issuer's policy. Most companies reserve rewards for cardholders whose accounts are in good standing, Cothern says.

For example, with the Capital One Venture card, you lose any rewards accrued during a billing cycle in which you're charged a late fee.

“If you default, some cards might wipe all your points out,” Cothern says.

Gotcha No. 8: We might take our time posting those rewards to your account. If you're counting on your rewards posting in time for an upcoming trip or splurge, think ahead, Cothern says. When you redeem points for a statement credit, it can take a week or more to post to your account. And sign-up bonuses, which you get for opening a new card and spending a certain amount in a certain time period, can take six to eight weeks to post after you meet the spending threshold, Cothern says.

“Most people don't read the fine print, and it really can take that long,” he says. “If you were planning to use the points to go on vacation in a month, you could get into trouble.”

To avoid getting hit with a “gotcha,” research how a rewards program works before you apply for a card. Because rewards are considered a bonus, the fine print isn't always as detailed as it is for other specifics, such as interest rates, Cothern says. Supplement a deep dive into the fine print with an online assessment of what rewards card bloggers and consumers say about a particular program.

Even if you do your research, though, you could still get hit with a surprise.

“The trouble with rewards is that the credit card companies give rewards and they can also take them away,” Valenti says.