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In a recent U.S. News survey, most rewards credit card holders indicated they are not maximizing the value of their credit cards. While they are earning rewards, 78 percent of respondents did less than an hour of research or no research at all when applying for a rewards credit card. Most (56 percent) compare existing credit cards against competing offers less than once every three years. And nearly 20 percent of rewards credit cardholders often carry a balance month to month, which can reduce or eliminate the value of rewards earnings.
The U.S. News survey revealed other findings on rewards credit cards, including:
- Cash back is the most-redeemed reward, with 45 percent of rewards cardholders redeeming rewards for cash back in the last year. Airline rewards were redeemed by 19 percent of respondents, hotel rewards 11, and gift cards 16.
- For 4 percent of rewards cardholders, their annual fee is more than the value of the rewards they earn.
- Less than 3 percent of rewards cardholders sign up for a card with the sign-up bonus in mind, although many cards offer bonuses worth hundreds.
- Nearly 12 percent of rewards cardholders sign up for cards to get brand perks and rewards, but 23 percent don’t use all of their cardholder benefits.
- Most rewards cardholders (66 percent) do not spend more money to earn rewards.
What are Rewards Credit Cards?
Rewards credit cards are cards that earn rewards when you make purchases. For example, cards that earn 1 percent cash back, or cards that earn one point or mile per dollar spent. Many offer bonus spending categories, such as airline credit cards that earn 2 miles per dollar spent with the airline, or cards that earn double points or cash back for travel or restaurant purchases. Rewards may be redeemed for cash back, travel, merchandise, gift cards, or other rewards. Often, rewards cards offer a sign-up bonus, such as $200 cash back when you spend $3,000 within three months of opening an account.
You can use rewards credit cards to save money with cash back and other rewards, taking cash back as a statement credit or using rewards to fund purchases such as travel or gifts. Rewards cards often come with cardholder benefits that can come in handy, such as free checked baggage, car rental insurance, extended warranty protection, and protection against theft or damage of items purchased with the card.
Rewards credit cards do have their drawbacks, however. They typically require good to excellent credit (a FICO score of 680 or higher). Rewards cards may have an annual fee and/or a high APR, which can outweigh any rewards you earn if you don’t spend enough. And as they reward you for spending money, rewards cards can become a vehicle to debt if you spend more than you normally would just to earn rewards, such as excess spending to earn a sign-up bonus.
Rewards credit cards are typically a good idea if you have a good credit score (a FICO score of at least 680) and you can manage your credit cards responsibly. You should plan to pay off your balance every month so that interest rates don’t eat into your rewards earnings. And you should be prepared to maximize the value of your rewards, such as meeting the sign-up bonus or hitting limits in bonus spending categories.
Maximizing the Value of a Rewards Credit Card
You can earn excellent rewards and get good value out of your rewards credit card if you use it wisely. Follow these U.S. News recommendations for maximizing the value of rewards credit cards:
- Choose a rewards program that aligns with your spending and preferred method of rewards. For example, a person who frequently flies with a particular airline may benefit the most from a credit card that is cobranded with the airline and earns a higher rate of rewards for airfare. People who dine out frequently may earn the most from a card that offers bonus points or a higher rate of cash back for purchases at restaurants.
- Try to earn the sign-up bonus, planning spending ahead of time so that you can meet the sign-up bonus spending requirement. Sign-up bonuses can be worth hundreds in cash back, travel, or bonus points, so you could be walking away from great rewards if you don’t earn it. However, you shouldn’t spend more than you can afford simply to earn a sign-up bonus.
- Know how much points or miles are worth, as not all programs value them the same way. Often, points or miles are worth one cent each, but there are many programs with valuations that are higher or lower depending on what you redeem.
- Take advantage of cardholder benefits, which can save you money and come in handy if you need support such as roadside assistance, trip cancellation insurance, or extended warranty coverage.
- Know how much a card costs to use, factoring in interest charges and whether or not you have to pay an annual fee. These can cut into your rewards earnings and diminish the value of a rewards credit card.
- Plan to pay off your balance each month. If you pay your balance each month, you won’t have to worry about interest charges eating into your rewards and can avoid creating debt you’ll have to pay off later.
- Compare cards before choosing a rewards credit card and shop for a new card annually, as there are many competitive offers available. Moving on to a new card each year allows you to maximize first-year rewards such as a sign-up bonus and waived annual fee, and you can find more competitive offers. Of course, you should only do this if you can manage your current cards responsibly.
Learn more about choosing the right rewards credit card and making the most of earning credit card rewards with the U.S. News guide to rewards credit cards.