Rewards are the primary reason people pick one credit card over another, but many of us don’t really understand the rewards programs that are driving our choices. The Consumer Financial Protection Bureau is investigating how well banks explain those rewards.
“We will be reviewing whether rewards disclosures are being made in a clear and transparent manner,” CFPB director Richard Cordray told Bloomberg. If not, he says the CFPB might make card issuers do something about that.
In the meantime, here’s what you need to know to make sure you’re getting full credit for the rewards you earn.
Points can be whittled away by inflation. “The biggest issue with credit card rewards is the rapid devaluation of points and miles” that customers earn from co-branded travel cards, says Credit.com credit and travel expert Jason Steele. When companies charge more miles for the same trip, Steele says, “The rewards received by credit card users are worth less when they try to redeem them then they were at the time they were received.” If your miles have gotten shorter over the years, consider a rewards card that isn’t tied to a particular airline or hotel chain and offers cash back, instead.
Not all redemption values are created equal. “Generally speaking, the best way to redeem rewards on travel credit cards is for travel, the best way to redeem on cash back cards is cash and the best way to redeem on other cards is typically gift cards,” says Anisha Sekar, vice president of credit and debit products at NerdWallet.com. The rewards from a card that promises, say, 1% or 2% cash back might be worth much less, especially if you’re “spending” those points on items in an issuer’s online merchandise catalog. “Typically, redeeming for merchandise is less valuable than redeeming for cash,” Sekar says.
Sign-up bonuses can require heavy spending. Sekar points out that some issuers offer bonuses as high as a couple hundred bucks just for signing up. But earning those points or cash back value requires a commitment: The fine print generally stipulates that the cardholder spend several hundred dollars — and some thresholds are even higher — within the first few months of having the card. So if you’re counting on a reward for signing up for a card, do the math beforehand and make sure your spending supports the program’s requirements.
Watch for point caps and sign-up requirements. Some card programs promise bonus earnings on certain categories of purchases, like restaurant meals or department stores. But check the fine print before you use these promos as an excuse to spend more: Many of these programs cap the amount of accelerated rewards you can earn. Steele says some programs cut cardholders off after they’ve earned only a few hundred bucks in extra rewards. Oh, and keep tabs on those rotating accelerated rewards categories. Many only run for a month or three months at a time, and some require you to register before you can earn those extra points.
Inactivity penalties can erase points. Some issuers implement what’s essentially a use it or lose it rule, says Greg Lull, spokesman at CreditKarma.com. “Some cards will penalize you for inactivity,” he says. “Go a year or so without earning any rewards, and you could lose the points you’ve already earned.” And while a growing number of reward programs tout their no-expiration policies, some points do expire. Lull says it’s especially important to keep an eye on this if your card is taken over by another bank; sometimes the new owner will set a deadline for cardholders to use their rewards.
Rewards are expensive if you carry a balance. Even if you’re a big charger, the amount you earn in rewards will pale in comparison to what you’ll pay if you revolve a balance. The Chicago Federal Reserve conducted a study and found that people with rewards cards are more likely to spend more and carry higher debt, which cancels out the value of any rewards you earn and then some.