Wednesday, June 11, 2008

Warily Eyeing Credit Card Reward Programs

Are Credit Card Rewards Programs Worth The Trouble?

Currently we have two credit cards. One we've had since we got married, almost five years ago. The other we got when we switched to the credit union.

The old Visa card is through a large national bank, and is pretty crummy. 24% interest, no rewards. The only reason we haven't closed it is that it's the oldest piece of our credit history. We'll keep it around until our mortgage is secured, then we'll close our account with that bank.

The newer card gets 1% cash back at the end of the year. It's convenient that we can just transfer money from our savings or checking to the credit card account, all in one spot.

Our Spending Habits

Neither of us likes carrying cash. I hate having things in my pockets, and she loses stuff in her purse. As a result, we use our credit card everywhere we can, our debit card where that doesn't work, checks where debit cards aren't accepted and cash as a last resort.

We always pay of the entire balance each month.

Current Rewards Program

I guesstimate that this year we've been spending about $2,200 on our credit card each month. If 1% cash back works the way I'm assuming it does, that means we'll get $264 back at the end of the year (.01*$2200*12).

Other Reward Options

Thinking that I'll get $264 back and knowing my average monthly spending means that I can now start comparing other credit card offers and maximize my rewards. Some cards appear to offer really good deals with reasonable APRs and no annual fees.

Let's pretend for a minute that I really did get 5% back on all purchases (there are a couple of exceptions). Spending the same amount each month would then get me $1320 cash back. (0.05*2200*12).

Is this really how it works? If I use the card responsibly (paid off in full each month!) do I really stand to gain that much in cash back? Does anyone have experience with any of these types of cards?

Other Factors

Our credit union is local. We will be closing our accounts when we move in January. Since we don't like our other credit card or the bank it's through, we'll need to get a new credit card anyways.

The cards I listed all require having 'Excellent' credit. My credit score according to Credit Karma is 811. My wife's is similarly high. That along with a car loan in our name and regularly paid cell phone bills I think might put us in the 'Excellent' category.

I'm not fan of credit card hopping. I don't want to switch or open cards every year in response to good deals, so I don't care much about the introductory bonuses or APY; I want to find the card that will be best in the long run.

I've heard Dave Ramsey's and JD's calls to get rid of credit cards, but that's not how we live. We have both been pretty financially reasonable, even before we had a budget. We treat credit cards like we would guns: useful but dangerous tools that need to be treated with respect.

I'd love to hear other's advice and experience with these or similar cards.


chackoc said...

The 5% back cards always have relatively onerous restrictions. Either they cap the amount you can earn per month or the 5% only applies to annual spending beyond some limit. So for example with the Amex Blue Cash card they say 5%, but in actuality you earn 1% on "everyday purchases" and .05% on all other purchases for the first $6500 in a given year. You then earn 5% on "everyday purchases" and 1.5% on other purchases for any money spent beyond that initial $6500. It's still pretty good as far as cash back offers go, but you need to spend a lot before it really starts adding up.

Brack said...

Hey - thanks for pointing to Credit Karma... Very informative site... As far as reward programs go, I know a friend of mine that just about paid for his honeymoon with rewards... he was smart about how he went about it, and which cards he used, and it worked well for him. I'm so focused on getting out of debt that I haven't really investigated the rewards side much, but I know it can be done...

Rich said...

@cackoc, you're right about the restrictions. The thing that drives me nuts it how the details are buried in fine print in the middle of a multi-page legalese document.

The different rewards programs have different restrictions and rewards levels which makes it difficult to compare them.

@brack, I've been on Credit Carma for about two months now and it seems to be a pretty good site. I was a bit worried about putting in my social security number, but so far nothing bad has happened.

drew said...

I recommend the Chase Freedom Cash card. It earns 1% on all purchases and a 2% bonus on the things you buy the most. No limits. Plus if you earn $200 in rewards, you can "cash out" with a $50 bonus.