Since their inception, rewards cards have held the allure of free money and travel perks once you rack up the miles. And now, they're easier to get, too.
"The credit card-issuing community seems to be loosening up a little," said John Ulzheimer, president of consumer education for SmartCredit.com. "Consumers are probably finding it easier to get a card today than 18 to 20 months ago."
Not only that, but consumers also are being lured by big sign-up bonuses. Last spring, Capital One gave away 1 billion frequent flyer miles in less than one month to new card holders who signed up for its Match My Miles promotion. Later that year, Citi offered one of the best deals around through its ThankYou Preferred promotion, where consumers could earn up to $500 in gift cards. And that's just par for the course.
"From the bank's point of view, they really love anyone with a credit card, so they're willing to give bonus upon bonus to get someone to sign up for their cards," said Anisha Sekar, vice president of credit and debit products for NerdWallet.
Of course, there are some downsides to rewards cards, too, including annual fees on some cards and restrictions on redeeming your bonuses, such as black-out dates on frequent flyer miles. But if you're in the market for a new card and you're looking to get into the rewards business, here are some things to keep in mind.
Value cash over miles or points
There are generally three types of rewards cards out there: cash back, where you earn cash once you reach a certain spending threshold; airline miles, where you earn a certain percentage of miles for every dollar you spend; and point cards, which you can redeem for things like merchandise. For Ulzheimer, cash-back cards are the best option out of the three.
"We understand the value of a dollar," said Ulzheimer. "And there are no black-out dates when it comes to money."
Pick a card that suits your lifestyle
When choosing a card, don't be lured in by a good deal on a card you probably won't even use. If you don't really travel, for instance, don't get an airline card.
"That sounds really simple, but it's a common mistake people make," said Amber Stubbs, managing editor of CardRatings.com. "But you have to think about your lifestyle and your spending habits."
On a related note, know what types of rewards you will earn. On the more general points or cash-back cards, you may earn rewards for certain categories, such as gas or home improvement purchases. These may even rotate by month, depending on the card. But if you don't spend money on gas or make purchases on that month's category, you'll lose out in the end.
It doesn't always pay to be loyal
Though you'll want to find a card that suits your lifestyle, just because you shop at a specific store doesn't necessarily mean you should jump on its rewards card. The best way to get the most out of your card may be to forgo a specific airline or retailer's branding card, and instead get a more general rewards card, or non-branding card. For example, a retailer may give 3% cash-back at its store and 1% everywhere else, while a non-branding card may give 3% cash-back anywhere you shop. If an airline card has black-out dates or a hefty annual fee, these can also be avoided by going with a more general rewards card.
"There are cards out there that are really flexible," said Stubbs. "You can use points for travel with any company, or can redeem for cash-back."
Speaking of annual fees, cards that charge them tend to give more on each dollar you spend, which is appealing, but you'll have to weigh your anticipated use of the card against the fee. These rates can range from $59 to as high as $450 a year, so if you don't think you'll earn that back with some extra rewards to spare, there are plenty of no-fee cards out there from which to choose.
Pay off the full balance
If you only take one thing away from this article, let it be this. Banks charge higher interest rates on rewards cards, and they earn more in interest than they pay out in rewards. That means consumers who pay interest on their rewards cards are essentially funding their own rewards program. Of course, it doesn't have to be that way. Ulzheimer recommends charging all your normal monthly expenses on your rewards card and paying it off in full each month.
"Then it's really no harm no foul," said Ulzheimer. "You're earning the rewards and the program is working for you."
On a related note, don't spend more than you normally would on a credit card just to watch the points and miles add up. "The minute you start chasing the rewards, charging things you wouldn't normally buy because you want to see a huge point balance at the end of the month, then you're in trouble," said Ulzheimer.
In addition, if you're hesitant about adding another credit card to the mix, remember that having more credit cards actually helps your credit score because it increases your credit limit (as long as you don't rack up debt, of course).
"You might keep a credit card in a drawer and never use it, but the fact that the account is open is helping your credit score," said Sekar.
Advanced rewards
There are even more ways to make rewards cards work for you, if you're savvy. If you don't think you'll make the spending threshold to earn a specific bonus — say, $500 within the first three months of owning the card — there are online payment processors such as Vemno that let you charge money to your credit card and then send it to another person. So you could send $500 to a family member, for instance, who can then give it right back to you, allowing you to meet that spending threshold without actually spending any money.
Another way to get the most out of your rewards card is by pooling points. Citibank recently announced a Facebook app that allows users to share its ThankYou rewards points, which could then be redeemed for big rewards, such as flights or hotel stays. Of course, there's a lot of coordinating that needs to be done, but it can be worth the hassle.
"In some cases, you can get better value out of the pool of points than each of the two card users can use independently," said Ulzheimer. "It's a great way to get better value out of your points."
Rewards cards picks from the experts
Don't know where to start? Our credit card experts recommend their picks for the best rewards cards out there right now.
Anisha Sekar of NerdWallet likes the Capitol One Venture Rewards Credit Card. It has a flat rate of 2% back on every purchase, so "it's simple to know what you're earning," though it does have an annual fee of $59. For a no-fee card, Sekar recommends the Capitol One Cash Credit Card, which as a flat rate of 1.5% back on all purchases.
Amber Stubbs of CardRatings.com recommends the Blue Cash Preferred credit card from American Express, which earns you 6% cash back at supermarkets, 3% cash back at gas stations and department stores, and 1% cash back on all other purchases. It has an annual fee of $75. For a card with no fee, there's its counterpoint, the Blue Cash Everyday credit card, which earns you slightly less in cash back, with 3% at supermarkets, 2% at gas stations and departments stores, and still 1% everywhere else.
John Ulzheimer of SmartCredit.com notes that the great sign-up bonus with the Chase Freedom credit card, popular over the holidays, is still going strong. Consumers earn $200 cash-back when they spend $500 in the first three months — "that's a 40% cash-back bonus, which is pretty amazing." He also likes Fidelity Retirement Rewards Card, where instead of earning cash-back, you can build a 401K or IRA with your rewards.
– Meredith Deliso
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