How to make the most of your first rewards card
By Allie Johnson
June 3, 2016
If you don’t learn how rewards cards work before you get your first one, your experience may not be very rewarding.
“If you’re going to use a credit card anyway, you may as well get an added advantage from the money you spend,” says Stephen Lesavich, attorney and co-author of “The Plastic Effect: How Urban Legends Influence the Use and Misuse of Credit Cards.”
Here are questions to ask and pitfalls to avoid with your first rewards card:
Are you ready for a rewards card?
Before you get a rewards card, make sure you’re in a good position to qualify for one and manage it well. Ask yourself:
- How is my credit? In order to be approved for a good rewards card, you typically need good to excellent credit, Lesavich says. A good FICO score ranges from 670 to 739, very good from 740 to 799, and excellent from 800 up, according to Experian, one of the three major credit bureaus. If you’re not sure about your credit score, you can pay about $20 for one at MyFICO.com.
- Do I pay my bill in full every month? Paying off your bill in full is especially important with rewards cards, which tend to have higher interest rates than other cards, says Linda Sherry, director of national priorities for Consumer Action. “Paying high interest can negate the bargain you’re getting by using a rewards card,” she says.
“If you’re going to use a credit card anyway, you may as well get an added advantage from the money you spend.”
— Stephen Lesavich, attorney and co-author
of “The Plastic Effect”
Ready to apply for a rewards card?
To pick the right card for you, consider these seven factors:
1. What type of card fits your goals? “If you know why you want a rewards card, it can help you narrow down your options,” says Rob Berger, founder of Dough Roller, a personal finance site. For example, if you hope to go on a European vacation, you may want a travel rewards card that can earn you a free airline ticket. If your aim is to save money with every swipe or dip, you might prefer a cash back card.
2. What are the rewards worth? Different cards offer different rewards, so consider the value of each mile or point. A ballpark figure is that each dollar you spend earns you a penny in rewards, but the reality is more complicated, and values are always changing. Check The Points Guy’s monthly valuation of rewards on a card you’re considering. In June 2016, values ranged from half a cent to over two cents.
3. What’s the sign-up bonus? Many rewards cards offer a sign-up bonus, but you usually have to spend a certain amount in a set time period to get it. Make sure you won’t be buying stuff you don’t need to meet the spending requirement and that you will be able to pay the bill in full, Lesavich says.
4. How can you redeem the rewards? Pick a card that offers plenty of options for redemption, Sherry says. For example, some cards allow you to transfer points to airline frequent flier or hotel rewards programs. Also, check online for reviews of a card’s redemption practices, Lesavich says. You may find some travel rewards may be almost impossible to redeem around holidays, for example.
5. What other perks does the card offer? Rewards cards often offer an array of perks. Some waive foreign transaction fees, which could save you 3 percent on purchases on your next trip abroad. Other cards offer free checked bags, which could save you $25 or more on each leg of your next flight. “There’s the potential to get some big value from the perks,” Lesavich says.
“If you know why you want a rewards card, it can help you narrow down your options.”
— Rob Berger,
founder of Dough Roller
6. What’s the card’s interest rate? The average interest rate for rewards cards was 15.3 percent in May 2016, while the average interest rate for low-interest cards was 11.96 percent, according to CreditCards.com’s weekly rate report. You should know what you would be paying in interest fees if you ever carry a balance, Lesavich says.
7. What’s the annual fee? Many rewards cards also charge an annual fee, which may be waived in the first year, Sherry says. Make sure the perks and rewards are worth more than that annual fee. Or consider no-annual-fee rewards cards, such as the Citi Double Cash Card or Discover it card. “There are plenty of good rewards cards that don’t charge an annual fee,” Berger says.
Avoid rewards card mistakes
Once you get your new card, use your plastic wisely so you don’t make a mistake that eats up your rewards or gets you into debt.First, don’t overspend to earn rewards. For example, it doesn’t make financial sense to buy a $100 dress you don’t need just to get a buck in rewards.
Second, learn how to maximize your points, miles or cash back with your card. Some cash back cards offer extra rewards in rotating categories, such as restaurants or home improvement stores, but you usually have to sign up ahead of time, Berger says. Many issuers also offer online shopping portals where you can earn bonus points or cash back, depending on the store.
If you don’t want the hassle of opting in for bonus categories every quarter or shopping at an issuer’s portal, a simple cash back rewards card may be for you, says Berger.
Berger’s is the voice of experience. He earned $2,000 in rewards in 2015, partly by paying his kids’ college tuition with his card.
“If used correctly, a rewards card can add a decent amount of money to your monthly budget,” he says.