5 smart questions to ask about your rewards credit card

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5 smart questions to ask about your rewards credit card


If you're a credit card user, chances are you may have a rewards card or looked into getting one.

A 2015 survey by TSYS of 1,000 American consumers found that 86 percent of those who preferred to pay with a credit card used a rewards card -- a credit card that earns you cash back, travel rewards or other perks for your spending.

It's not especially surprising -- who doesn't love getting rewarded for spending, after all?

Getting a rewards card generally requires good to excellent credit. Once you've been approved, rewards credit cards can offer great benefits, but it's important to make sure that you're exercising smart habits as you use them.

Here are five questions you can ask to help you get the most value out of them.

1. Am I overspending just to rack up rewards?

With rewards cards, there may be a temptation to focus on the amount you're earning rather than the amount you're spending, which could result in you spending more than you anticipate.

A 2010 National University of Singapore study of 12,000 credit card accounts from a U.S. financial institution showed that when consumers were enrolled in a cash-back rewards program, they spent an average of $68 more per month in the first quarter after enrolling, compared to when they weren't enrolled.

Although it may be appealing to spend more since you're getting rewarded for it, one thing to keep in mind is that you're not necessarily going to be raking in the big rewards without big spending.

Consider this example: A United Airlines round trip economy Saver Award between San Francisco and London redeems for 60,000 miles plus fees (as of June 15). Using the United MileagePlus® Explorer Card, which can earn you one mile per $1 spent on all non-United purchases, you may have to spend up to $60,000 to earn the 60,000 miles you need to redeem for this ticket (this isn't accounting for points bonuses or promotions).

For new applicants, the card can earn you a 40,000-mile bonus when you spend $2,000 in the first three months after opening your account, but you may still need to spend up to an additional $10,000 in non-United purchases to reach the required 60,000 miles.

2. Are the rewards I'm receiving greater than any fees I'm paying?

Rewards cards can come with fees that you should familiarize yourself with. Ideally the value of the rewards you're receiving should be greater than any fees you're paying; if not, the card may not be a great fit.

One common fee to be aware of is the annual fee; although not all rewards cards charge annual fees, the ones that provide the most valuable rewards generally do. For example, the Barclaycard Arrival Plus® World Elite MasterCard® charges no annual fee for the first year, but $89 for each year after. The Blue Cash Preferred® Card from American Express charges an annual fee of $95.

If your card has an annual fee, it may be a good idea to calculate whether the value of your rewards is greater than this fee.

Let's look at the Capital One® Venture® Rewards Credit Card as an example. It doesn't charge an annual fee for the first year, but after, you'll pay $95 annually. With this card, you can earn two miles per dollar on purchases.

Step 1: Find out the dollar value of a mile or point in the rewards program -- you should be able to ask your credit card provider for this. According to Capital One, one mile is worth one cent when redeemed for travel (rates may vary for other redemption options, including statement credits and gift cards).

Step 2: Since the annual fee after the first year is $95, calculate what $95 is worth in terms of miles. Dividing $95 by 1 cent shows you that this equals 9,500 miles.

Step 3: Determine how much money you would have to spend to earn these 9,500 miles. Because this card earns you two miles for every dollar you spend, divide the 9,500 miles by 2 miles per dollar. This equals $4,750, the "break-even" point.

In other words, if you spent more than $4,750 per year (after the first year, which doesn't charge an annual fee), the value of your travel rewards would be higher than your annual fee.

Spending less than this would mean you're paying more for the annual fee than you're earning in rewards. If this is the case, you may want to consider a different card that better fits your spending levels.

3. Are my rewards losing value over time?

Just as inflation can diminish the value of your dollars, it can also diminish the value of your rewards. In March 2016, American Airlines increased the number of miles needed to redeem many types of award travel.

Although not all award categories changed -- a one-way MileSAAver economy ticket across the contiguous U.S. states stayed at 12,500 miles -- some categories saw drastic increases; a first class ticket for the same flight increased from 32,500 to 50,000 miles.

This devaluation meant that after March, miles you held through the AAdvantage® program were now generally worth less.

Since your rewards could be losing value over time, it may be a good idea to redeem them regularly and avoid storing them up.

4. Am I keeping track of my rewards?

Although building up your rewards stash over time might be satisfying, it's ultimately redeeming them that brings value. But each year, lots of miles, points and other rewards go unclaimed -- around 16 billion dollars' worth across the U.S.

So why are people leaving money on the table? You might not realize that your rewards can expire after a period, or you simply forget about an account.

Fortunately, there are a number of solutions. You could make a simple spreadsheet where you manually track your rewards accounts on a regular basis, or you could use an online tool such as AwardWallet or Birch that does this for you.

Birch also allows you to set reward "goals" and helps you gauge when you'll reach them based on your previous spending. If you're considering a new rewards card, it can recommend the best card for you by looking at your spending habits.

5. Am I making use of additional rewards benefits my card offers?

In addition to earning you cash back, miles or points, your card may also offer other perks such as an online shopping portal that can boost your rewards potential.

Through programs such as Chase's Shop through Chase℠ portal and Discover's Discover Deals, you can shop popular online retailers and earn bonus points or cash back.

Through the Shop through Chase℠ portal, you can earn two points for every dollar you spend at Apple or five points for every dollar you spend at Nike. All you have to do is log in with your Chase account and click through to the store's site.

It's worth having a look to see whether your card provides this kind of service; you could earn additional rewards at online stores you might already be shopping at.

Bottom line

Using a rewards credit card can be a great way to earn cash back, travel miles or points as you spend. By asking yourself these five simple questions, you'll be on your way to getting the most out of your card.

About the Author: Mika Bhatia is a Staff Writer for Credit Karma. She's worked in financial services and tech, and has now found the perfect union of the two at Credit Karma. When she's not busy coming up with credit-related analogies, she's most likely supporting the Warriors, enjoying a fine cup of British tea or doing yoga (goal: completing a headstand without toppling over).

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