How to Choose the Best Reward Credit Card

Here's a piece from Yahoo that offers some suggestions on how to pick the best reward credit card. It offers suggestions on all sorts of reward credit cards (merchandise/retail, cash- back, and travel), but here's the bottom line:

Before comparing offers, evaluate your monthly and annual spending levels to choose the best deals for you, advises Greg McBride, a senior analyst with Bankrate.com. The answer just might be none at all. If you tend to run up balances on your credit cards, or lack the discipline and money to pay off your debt regularly each month, then a reward card could be an invitation to disaster. Interest rates on rewards cards, while increasingly competitive, are at least 2 to 3 percentage points higher than rates on regular cards--which could mean you'd pay well over 20 percent on your balance. You don't want to join the increasing ranks of Americans who are awash in debt.

Still, if you're diligent about managing your finances, the rewards can be tempting--especially as some cards have started to offer more points or cash back for those who carry a balance. For the right user, they can prove worthwhile.

I agree with this 100%. If you can't manage your credit (and your credit card), then no reward program in the world is worth having one -- you'll easily eat up all your "rewards" in interest and fees. On the other hand, if you have control of your credit and spending, then why not get some extra rewards for doing something you already do?

I prefer cash-back credit cards. Last year I earned over $300 from one (plus saved a ton on car maintenance with another one). The key was knowing what I wanted in rewards (mostly cash, but I'd take "auto bucks" too since it was worth more than the cash) beforehand and selecting my cards based on this criteria.

The piece gives some of the advantages of cash-back cards including the one that I think is the best advantage of all:

Slow redemption and limited choices on merchandise cards caused Jay Klauminzer to switch to a cash-back card. "You're limited only to what they have," says Klauminzer, 26, a management consultant in Washington, D.C. "It didn't feel very rewarding. With cash, I can use it for whatever I want."

With cash, you can buy anything -- airline tickets, groceries, gas -- whatever! It's totally flexible! And besides, many of the programs try to rip you off with high-priced merchandise you can "buy" with your points -- products that would have cost half as much if you'd paid for them in cash. That's why I've been a cash-back credit card user for years.

Comments

[jhawsey]

Cash back is the way to go. However they don't all make it perfectly clear about how to get your rewards or how much rewards you have. You have to dig a little

[My New Choice]

You hit on a very important point in that rewards cards are not much benefit if you have trouble managing your finances or have a large amount of debt. While some people will fall into the trap of overspending because of the reward, it is a great way to earn some money on your normal purchases.

[MissPinkKate]

I don't carry a balance- and I love my Amazon.com rewards card. It's like, weeeee, free money for me to buy fun things!

[Alicia]

Does anyone know if you have to pay taxes for cash back rewards?

[Credit Card Cash Back Rewards Enthusiast]

In answer to Alicia's question, you don't have to pay taxes on cash back rewards. For tax purposes, they're treated like a "rebate".

[Jim]

Sound advice. One point though... don't be misled by the cash back percentages the card offers. There could be hidden caps and tiers to those percentages that may make that card actually pay less that some other card. Mr. McBride is spot-on with his advice to know your monthly expenses. Once you know that, you're ready to see which card pays the highest for you.

[Personal Finance Guy]

Jim, your comment about first knowing your monthly expenses then calculating which card will pay you the most reminds me of a credit card reward calculator. It does exactly what you described, but probably a bit faster than you could do it by hand. : ) It also does a multi-card calculation where it figures out the best 2 card combination, 3 card combination, etc. for your spending profile.