Everybody likes a reward, right? Well, when it comes to credit card rewards programs, how worthwhile the rewards are depends on the terms of the program, and on how you use the credit card. The best credit cards for some people may not be suitable for others.
Before you sign up for a rewards program, ask yourself these 10 questions:
1. Are the rewards cash back or for specific goods or services?
Some programs pay rewards in the form of cash back, while others award you points redeemable for things like merchandise or travel.
Tip: All else being equal, lean towards cash rewards since they are the most versatile.
2. What is the cash value rate?
To compare the actual value of different types of rewards programs, figure out the cash value of each reward earned for every dollar you spend. This allows you to compare rewards across different categories.
Tip: Even programs that pay off in travel miles or merchandise usually have a cash conversion rate you can use for comparisons.
3. Are rewards automatic or do you have to register periodically?
Many credit cards pay their awards automatically, but some have special categories – such as more cash back for gas or retail stores – that require you to register periodically.
Tip: Those special categories can have the highest reward rates, such as 5 percent for a limited time, compared to a normal rate of 1 percent.
4. Will you spend more to chase rewards?
Typical rewards have a value of 1 percent of what you spend, while credit card interest rates average 13.49 percent (and rewards cards are usually higher), so additional spending could easily cost more than the rewards you earn.
Tip: If earning rewards influences you to spend more, these programs will probably hurt you more than they will help.
5. Do rewards expire?
Some rewards have a limited shelf life – they expire after a specified period if you don’t redeem them.
Tip: Make redeeming points part of your routine when you pay the credit card bill.
6. Will you be diligent about redeeming rewards?
Some people sign up for rewards programs but never bother to cash them in, which is a waste.
Tip: Even if rewards are not scheduled to expire, credit cards do periodically terminate these programs, so if you don’t expect you’ll regularly redeem your awards, don’t choose a rewards card.
7. How does the interest rate compare with comparable rewards credit cards?
Comparing rewards may be the fun part, but don’t forget to compare interest rates before choosing a card.
Tip: Differences in rates are often much greater than differences in rewards programs. Even when choosing a rewards program, keep your primary focus on the interest rate.
8. How does the interest rate compare with non-rewards cards?
In exchange for the rewards you can earn, rewards credit cards typically charge a higher interest rate than non-rewards cards.
Tip: Only by knowing how much extra interest you would pay will tell you whether the potential rewards are worth the price.
9. How much of a credit balance do you expect to carry?
The above interest rate comparisons are especially important if you expect to regularly carry a significant credit balance. The higher the balance you carry, the more higher interest rates will cost you.
Tip: Consumers who carry little or no credit balances from month-to-month don’t have to worry about paying extra interest for their rewards.
10. Are there fees associated with this card?
Besides higher interest rates, annual fees are another way you might have to pay for earning rewards.
Tip: There are no-fee rewards cards available, so focus on these when shopping for a rewards credit card.
Best case, if you earn generous cash rewards and pay off your credit balance every month, credit card rewards programs can be a way of getting a discount on things you would have bought anyway. However, if you often carry a large credit balance or are tempted to buy things you normally wouldn’t, rewards programs might not be worth the cost for you.
What do you look for in a rewards credit card? Let us know in the comments!
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