Jun 29, 2009

Guest Post: Types of Reward Credit Cards and How to Evaluate Them

This is a guest post by Mr Credit Card from www.askmrcreditcard.com. Mr Credit Card reviews credit cards. He has also compiled a list of what he thinks are the best credit card deals available.

Firstly, I would like to thank Cathy for giving me the opportunity to write this guest post.

If you are like Cathy and have no credit card debt (or rather, you pay off your credit card bills in full every month), then you should be taking advantage of rewards that credit cards offer. In this post, I'm going to run through the types of rewards (mainly reward programs and cash rebate cards) that are available and and how to evaluate them.

But first, let me just say that there are probably three types of reward cards that folks should consider. And your choice really depends on how you would use them.

The first category are airline credit cards. These cards (to be honest) are only for those who are true frequent fliers of a particular airline. For example, if you are always flying on United, then there is a case to be made for getting a United Airlines credit card. The advantages of getting an airline card are:
  • Most will allow you to earn double miles for every dollar you spend on the card when you buy their airline ticket
  • The higher end cards allow you to earn points towards elite membership status
  • The higher end cards also have perks like free companion ticket once a year
  • Allows you to use your card for club lounge access
The main disadvantage of these cards are:
  • They charge an annual fee (sometimes over one hundred dollars)
  • Their interest rates aren't particularly attractive (never carry a balance with airline credit cards)
It is obvious that unless you are a jetsetting business executive or or business person that flies a lot, you are better off getting regular rewards credit cards.

The second type of reward cards are those offered by the credit card issuers themselves. Most credit card issuers have reward programs that are more well rounded and cater to those who want to earn points for rewards, but are not exactly frequent fliers. Here is what a typical reward program would look like:

Typical Reward Program - A typical reward program has a few types of rewards. They are :
  • Travel Rewards
  • Gift Cards
  • Merchandise
  • Cash Rebates
  • Charities
Travel Rewards - Let's start with travel rewards. Traditionally, this has been the most popular form of rewards. After all, who would turn down a free airline ticket? There are a few types of travel rewards that are available in any given reward program.
  • Transfer points into air miles- Only a couple of programs allow you to transfer reward points you have earned to air miles. Examples would be the American Express Membership Rewards Program and the Starwood Preferred Guest Program. This form of travel rewards would suit those who are members of multiple airlines' frequent flier programs.
  • Use Points and Book Flights - This is the more traditional way of using points for air tickets. With a frequent flier program, you are subject to the airlines' blackout dates and quotas for that particular flight for those who redeem air miles. The credit card reward programs always say that their has more flexibility because they do not have to use a particular airline but can use any airline. An example of this system is to use 25,000 points for a round trip domestic economy flight.

    But this system is not all rosy either. Very often, you have to book your flights 21 days in advance, stay a Saturday night and very often, you will not get your preferred flights.

    If you are a last minute type of person or do not like weekend stays, or if you like searching for your own deals, then this method of reward redemption probably does not suit you
  • Do Your Own Booking - To get around the issue of restrictions, many programs now allow you to use points to book any flights you want on your own. You can then submit your expenses and get a statement credit. The Discover Escape Card uses this method, as does the Amex Blue Sky. Some like Citi's thank you network allow you to book any flights or hotels from expedia.com. This method of redeeming points for travel rewards will suit the true bargain hunter because you can hunt for the best deals. This method is probably the most flexible.

    However, please be aware that some programs allow you the flexibility to book whatever flights and hotels you want but you have to use their own "in-house travel agent" which itself is subject to the seats and quotas made available to them by the airlines and wholesalers.
Merchandise Rewards - Credit card reward programs also allow you to exchange points for merchandise. Most programs are stocked up with many items from Apple iPods to coffee makers to digital cameras. I personally prefer not to use my points to exchange for such items because I feel you always need too many points for the particular price points. Still, if you do not want to pay for a new coffee machine and you have enough points, that's one way to get a free one.

For merchandise, it is really hard to evaluate which program is better. The items keep changing and the points requirement may change from time to time as well.

Gift Cards - You can also exchange points for gift cards. There are some aspects to consider before you a card. The better programs allow you to exchange for example, 1500 points for a $15 card, or 5000 points for a $50 card. The not so good ones require, say, 2000 points for a $15 card or 6500 points for a 5000 card.

If you are a gift card junkie, then the thing that you want to watch out for is if your favorite retailers are on the merchants list. And also, how many merchants do they have as their partners?

Cash Rebates - If you are looking to earn cash rebates, I would suggest getting a dedicated cash back credit card. That is because most reward programs pay less than 1% cash rebates (you get 1% for the most basic cash rebate cards!) and only pay 1% when you redeem for lots of points! You should not even bother with them.

Charities - There will be some of you who are very charitably inclined and would like to donate cash or points to charities. Well, most reward programs do have charity partners. Some like Membership Rewards and Capital One have over a million charities that you can donate to. Others have less, but may have exactly the charity that you were thinking about.

Other perks - Credit Card issuers have become innovative in the types of rewards that they offer. Citi's Thank You Network for example, allows students to use points to pay off their student loans. They also allow you to use points to reduce your mortgage principle.

Online Shopping - Cathy has pointed out that she uses Swag Bucks for her searches and makes money by referring friends and earning Swag Bucks. Well, credit card companies have the same features. Swag Bucks is essentially a big affiliate shopping portal. Credit card companies have the same arrangements with merchants as well. So for example, if you have a Discover Card and you decide to shop at landsend.com, rather than going to landsend.com directly, you could log in to your Discover account and go to landsend.com from there. If you do that, you could earn 5% rebates off what you spend and charge on your Discover Card.

Other cards like Chase are now beginning to implement such programs. Others like shopamex.com do not let you earn discounts or cash rebates, but allow you to earn extra points or use your reward points to shop for what you want.

How Do You Choose a Reward Card?

The key to choosing the right reward card is to actually know:
  • How much you spend a year?
  • What sort of rewards you would like to redeem your points for?
  • Whether these rewards are available in the program
If you do not intend to use reward points for travel or any of the types of rewards available in a typical reward program, then the third type of reward card to consider are cash back credit cards. In fact, if you combine the right card with coupon clipping, you will save even more at the supermarket.Here are some tips to choose the right one:
  • Choose cards that pay more than 1% rebates - Generic cards pay 1% rebates for every dollar that you charge to the card. Avoid these, there are better ones out there
  • Look for cards that pay 3% to 5% on things like gasoline supermarket, travel, restaurants etc
  • Make sure you can earn unlimited rebates
  • Decide how you want to receive your cash rebates - some send your checks automatically, some require that you request a check and some automatically give you a statement credit
How to choose a cash back credit card that's just right for you?

The first thing you have to do is to write down all that you charge to your card. And also categorize your spending into the following categories:
  • Travel
  • Gasoline
  • Supermarket
  • Dining
  • Internet Shopping
There are other categories that you can slice and dice but most cash back cards come with these spending categories. The next step would be to do research on the cash back cards that major issuers have and see which card will give you the most rebates. The is a very tedious task but well worth it because with the right card, you can earn a few hundred dollars in cash rebates in a year.

So I guess that's it from me. Remember, if you pay your bills in full every month, then take advantage of rewards that credit card companies offer. If you are the sort of person that cannot control your spending when you have a credit card in your wallet, then you should perhaps stop using a credit card and just use cash. Just bear in mind that using cash may not work for everybody!.

Here are some other resources for reward programs:

FlyerTalk Forum
Insider Flyer


lily said...

Ha..very good post. I use the blue cash amex. 5% rebates on supermarket after I put $6500 on the card at the beginning of my year. My card plus the store coupons really do add up the savings.

Camp fair said...

I have a Discover and love it! I've been a "member" for 10 years and its always been great. My husband uses this card when he buys gas, hotels and food for work then gets reimburessed, so we make out very well! I haven't bought a wedding gift using cash in years b/c I always get bed bath & beyond gift cards. I love my discover!!!

Larry said...

Cash back cards are the way to go. Without a doubt!!!!! I too used discover for YEARS. But then about 2 years ago I found that I could get better cash back awards using the Chase Visa card. Jessica might want to give it a try.

Mama Bird said...

We have an American Airlines card. We never carry a balance so we don't worry about the interest rate. We do pay a fee, but it's worth it for us since we fly to Australia every year and they are a partner with Qantas. Between miles from purchases and miles from flying, we have had enough miles for 3 free flights all the way to Australia and this year had enough for two of the domestic portions to LA. Not bad and far better deal for us than the cash back or other reward programs. You have to do some math though to figure out what works best for you.