TV spokespeople are quick to tell you why the credit card they’re shilling is better than the rest.
Double points! No blackout dates! No annual fee!
They make it seem so easy to rack up points and trade them in for free flights and top-shelf resort stays.
But there’s no such thing as a free lunch — even if you’re earning points on it.
That’s not to say there aren’t benefits to using reward credit cards. You can earn free travel and other perks — but you have to be strategic to make them work for you.
Before you apply for that hip new card you’re seeing in commercials, ask yourself these five questions first.
- 1 Aileen Perilla/ The Penny Hoarder 1. Will You Really Pay the Bill in Full Each Month?
- 2 2. What Does That Credit Card Agreement Actually Say?
- 3 Aileen Perilla/ The Penny Hoarder 3. Does the Credit Card Offer Cash Back or Reward Points?
- 4 4. Is There an Annual Fee?
- 5 Aileen Perilla/The Penny Hoarder 5. Is Your Normal Spending Enough to Earn the Sign-up Bonus?
1. Will You Really Pay the Bill in Full Each Month?
If you already have credit card debt, stop reading now and focus on paying that off.
Dan Miller of the travel blog Points with a Crew said that financial discipline is the key to success with rewards credit cards.
“Make sure you have the ability to pay off your bill in full each month,” he said. “If you don’t, interest and fees on these cards are going to eat up any rewards you might earn.”
If you are steadfast about following your budget and meeting your financial goals, you’re a good candidate for a rewards credit card. But don’t let your own confidence fool you.
If you get a higher credit limit than you expected for the new credit card you applied for, ignore it. Don’t treat it as an invitation to spend.
Scott Rick, professor of marketing at the University of Michigan, explained that we’re better at planning for future income than we are at anticipating future expenses.
“We’re good at ignoring bad news and looking for reasons to indulge,” Rick told The Penny Hoarder.
2. What Does That Credit Card Agreement Actually Say?
Be sure to read through all the details of a credit card agreement before signing up. It’s important for two key reasons.
First, you want to have a clear view of interest rates, annual fees, late fees, expiration dates, foregin transaction fees and other conditions of use.
Reward credit cards usually charge a higher interest rate than non-rewards cards, so keep that in mind as you compare offers.
Second, you want to make sure the benefits of the card are worth it.
For example, it would be a waste of time to use a card to earn flight rewards if you can’t actually use the points or miles on your favorite airline.
3. Does the Credit Card Offer Cash Back or Reward Points?
Some credit cards offer cash back rewards, while others award you points redeemable for things like flights and hotels.
Cash-back cards are often a better option. They hold their value better than points, provide greater flexibility and your rewards are easier to use. On some cards, you can set up an automatic transfer to an account — even that credit card — when you accrue a certain amount.
There’s also several good cash-back rewards cards without an annual fee, which is another big plus.
How Does the Point System Work?
If you opt for a rewards card that accumulates points on purchases, make sure you understand:
- How many points you earn for certain purchases.
- The cash value of each point.
- What you can redeem your points for.
Each credit card company operates its point system a little differently, so certain purchases can help you earn rewards faster than others.
The Chase Sapphire Preferred card, for example, offers five points for every dollar spent on travel booked directly through the Chase Ultimate Rewards portal, along with three points per $1 on dining and two points per $1 on all other travel expenses.
Meanwhile, the Citi Premier card offers three points per $1 spent at restaurants, supermarkets, air travel and gas stations, as well as one point per $1 on all other purchases.
Most credit card programs let you directly redeem their points via an online portal.
Many programs also allow you to transfer your points to partners and then redeem them for flights or hotel stays, which is another smart way to get more bang for your points.
4. Is There an Annual Fee?
Some reward credit cards require a yearly fee for the right to access their benefits.
Annual fees usually start around $50 and can jump to $600 or more for premium-level cards. However, the exact fee varies, depending on the credit card company and the level of perks and rewards offered.
The Platinum Card from American Express is one of the priciest, with an annual fee of $695.
But credit card writer Beverly Harzog says annual fees aren’t all bad.
“Be sure the rewards you earn are far going to outweigh their fee,” she said.
Many cards waive the annual fee for your first year, and you can always call to ask them if they’ll waive it a second time.
Not all reward cards charge an annual fee. If you’re just starting out, focus on those offers when shopping for a new card.
Some popular rewards credit cards without annual fees include:
5. Is Your Normal Spending Enough to Earn the Sign-up Bonus?
The real value in miles and points is from welcome offers, which earn you far more than the typical 1% or 2% reward.
“If you’re just spending naturally on your card, it’s hard to get enough points or miles to do anything,” Miller said. “You need to be a higher spender outside of those opening offers.”
Here’s a trick to get around this — without drowning in debt.
Use your rewards credit card to pay for nearly everything you buy. Then log into your account each day, or every other day, and pay off the balance in full.
This helps keep your credit card balance small and manageable. You’re also less likely to splurge on things you can’t afford. After all, you’ll have to pay for whatever you just purchased within the next couple days.
If you’re constantly aware of your credit card balance and you pay it off several times a week, you can still take advantage of those sweet rewards points without racking up debt and interest.
Before you sign up for a rewards credit card, look at your budget and see how much you normally spend in a month.
If you usually spend about $1,000 a month on all your expenses, you can easily hit a sign-up bonus that requires you to spend $1,000 in the first three months.
But if the sign-up bonus requires you to spend $5,000 in the first three months, well, you should probably go with a different card that offers a more attainable bonus.
Some bills, like utilities and rent payments, often charge a fee if you pay with a credit card instead of a checking account. Use your debit card to cover these expenses and use your rewards credit card for everything else.
Rachel Christian is a Certified Educator in Personal Finance and a senior writer for The Penny Hoarder. Lisa Rowan is a former senior writer for The Penny Hoarder.