What types of rewards cards work best for families?
By Tina Orem
December 2, 2014
Parents are like cowboys: We get dirty all the time, we spend a lot of time chasing critters that don't want to be caught, and we find the experience rewarding.
But what about rewarding ourselves in another way — how about every time we buy groceries for our little cowpokes? That's the power of rewards cards.
We asked a couple of credit card experts what parents should know about four popular categories of rewards cards. Here's what they had to say.
Best for: Traveling families, families with faraway family members, parents who travel on business
Advantages: Free airline tickets, hotel travel and discounted travel
Look for: Cards with big introductory bonuses, said Jonathan Roisman of research firm NextAdvisor in Burlingame, California. Roisman recently researched over 100 credit cards to find out which ones have the best terms, rates and benefits. He said 40,000 miles is a top-notch introductory bonus for a card with travel rewards. He also said travel cards tend to offer one mile per dollar on average; if you can find one that offers two miles per dollar, it may be worth a second look.
Also, look for cards that let you redeem your points to the penny. Card issuers usually award points in whole numbers, but plane tickets aren't priced that way, said Randy Hopper, vice president of credit cards and business optimization at Navy Federal Credit Union in Washington, D.C. For example, your card may have 400 miles for you, but your plane ticket likely costs something like $407.34. A better card lets users convert, say, 40,734 points into $407.34 for the ticket.
Watch out for: Convoluted points-to-miles systems or high annual fees (in many cases for many credit cards, the issuer will waive the annual fee for the first year, but know what the fee will be after that year ends). “Earning the points doesn't necessarily mean that you have a lot of value there,” Hopper said. He said Navy Federal used to have a credit card that allowed members to earn one point per dollar, and users had to convert the points to 2 percent cashback rewards to then get travel rewards. It has since restructured its credit card offerings to make things simpler after asking customers what they wanted.
Roisman says you should also watch out for the fine print on introductory bonuses — they often require you to spend thousands of dollars in the first 90 days or so to get them, and if you can't swing that amount, you might just be digging a debt hole.
Best for: Parents who just want something simple
Advantages: Every purchase earns cash rather than convoluted points or hard-to-use miles
Look for: Cards with at least 1 percent cash back across the board, maybe higher rates for things you buy often (groceries or dining, for example).
Watch out for: Annual fees that are so high or whose cashback percentages are so low, you'll have to spend thousands just to recoup the annual fee.
Also, beware of merchant category codes (MCCs). They identify store types and thus could influence your cashback rate if, say, the card offers more cashback for gas purchases than grocery purchases. The gas station at the grocery store might not qualify for the higher rate. Having a card with a $60 annual fee and a 1 percent cashback rate means you'll have to spend at least $6.000 a year on the card just to recoup your annual fee, much less earn true “rewards.”
Learn more about cashback cards.
Best for: Parents who drive all over creation or families who live in high-gas-price markets
Advantages: A break on the price of a very expensive commodity
Look for: Cashback cards with gas bonuses. Roisman said many gasoline rewards from the cards in his study are actually cashback rewards. He said you should look for around 2 percent cashback on gas purchases. “Three percent, that's golden,” he added.
Watch out for: Too much emphasis on gas purchases to boost rewards. Many gas-oriented cards offer a higher cashback amount (say, 2 percent) on gas purchases and then a lesser amount or nothing on other purchases. That hyperfocus on gas rewards can easily backfire, Hopper said.
“Rewards are key, but it really is important to understand the overall value of the product.”
–Randy Hopper, Navy Federal CU
“I think that consumers in general of the last three to five years have really managed their gas budgets a little bit tighter, and so the value of 3 percent or 5 percent back on just gas doesn't necessarily have the same meaning that it did a few years ago,” Hopper explained.
If the card carries an annual fee of $163 (that's the average according to a CreditCards.com report) and returns just 2 percent back, that means buying at least $8,150 in gas a year just to recoup your annual fee. Also, you might not be able to get your hands on your rewards right away. Many cards let you accumulate cash back over the course of a year but only distribute your reward in, say, January or February, Hopper said. And some cards only let you apply the cash reward to your balance rather than putting it in your checking account so you can use it to pay the rent.
One more thing: Don't expect introductory bonuses. “It's not like a travel card, where if you spend a certain amount of money, you're going to get $400 or $500 back,” Roisman cautions.
Best for: Brand-loyal families
Advantages: Can cut the cost of big-ticket items, score discounts on luxury goods, get stuff cheaper from favorite retailers
Look for: There are a number of retail cards with generous discount/cashback rewards programs that are worth your time — provided you pay the balance at the end of each month. Look for cards that give back $10 for every $100 you spend, or 15 percent off on Tuesdays, for example. That said: “I don't think they're as popular as they once were, considering a lot of the banks offer flexible cards that offer you cash back and travel rewards that you can spend almost anywhere. People don't want to be limited to one company when they can get the same rewards with a different card and they can spend that anywhere else,” Roisman said.
Watch out for: Crummy interest rates. “It's hard to compete with when you're standing at the register with your large purchase and they offer 10 percent or 15 percent off for the application,” Hopper said. “Over the long haul, maybe you'll get that 15 percent on your first purchase, but you won't get the most advantageous rate on those products. You can get locked into having to shop at one particular retailer.”
Also, watch for rewards ceilings. “A lot of times the percentage is capped after a certain amount, so if you spend a certain amount of money, after that, you're not going to get the same bonus back,” Roisman noted.
“Some cards have like 25 percent interest rates, which, if people aren't careful, that could be very dangerous very fast.”
–Jonathan Roisman, NextAdvisor
You can earn some pretty lucrative rewards with credit cards if you're savvy, the experts say, but it's dangerous to fixate only on rewards.
“Rewards are key, but it really is important to understand the overall value of the product from the rates, the presence of an annual fee and having a good relationship with that issuer. From time to time, you're so busy you might miss a payment or be late on a payment, and so you want to have a good relationship with your issuer so that you can work through that kind of thing,” Hopper explained.
“Some cards have like 25 percent interest rates, which, if people aren't careful, that could be very dangerous very fast,” Roisman added.
Also, don't even think about applying for a rewards card if your FICO credit score is below 650. If that's the case, “just focus on rebuilding your credit,” says Roisman.