With debit card rewards on the decline and rewards credit cards offering larger incentives for signups and better rewards, many rewards cardholders are planning to redeem those credit card rewards to fund summer vacations. According to the Capital One Rewards Barometer, a quarterly survey of U.S. consumers, half of respondents planning summer trips will pay at least some of their travel expenses using rewards, compared with 42 percent last year.
Even as airlines tighten their belts and increase fees, some airline credit cardholders now enjoy extra perks. "Airlines have started to charge for more things, but with an airline rewards credit card, you can get things like your first bag checked free and priority boarding," says Erik Larson, president and founder of NextAdvisor.com, which provides consumer-oriented research on credit cards and other products.
However, rewards credit cards often carry higher interest rates and fees than traditional cards, so they don't make financial sense for everyone. Here's a look at how smart rewards cardholders rack up points or miles--without racking up debt.
1. Choose the right card for your needs. Before signing up for a rewards card, analyze your spending habits to see where and how you use credit. Are you a frequent flyer on a certain airline because you live in a hub? Or do you tend to spend more on groceries and gas? Choose your card accordingly. "If you sign up to get really great bonus points with an airline, it may not be your best card in the long run if you don't use that airline," points out Amber Stubbs, senior managing editor at credit card comparison site CardRatings.com.
Also consider any fees attached to the card. Airline rewards cards are especially likely to charge an annual fee because their cardholders tend to be loyal. "If you use the card often, then the annual fee isn't usually an issue because you can get way more out of it than you spend," says Stubbs. "If you are a light user, you need to do the math. Oftentimes, you need to spend so many thousands of dollars before you break even."
Also consider how complicated the points or rewards redemption process is. When in doubt, Larson recommends getting a card that offers cash back, because "it's very clear what you're getting for what you're spending. With other cards, it's a little harder to figure out."
2. Pay off the balance every month. Aside from choosing the wrong card for their needs, the biggest mistake rewards cardholders can make is carrying a balance. According to Larson, the APR might be 2 to 4 points lower on a non-rewards card, so carrying a balance on a rewards card costs more.
John Ulzheimer, president of Consumer Education at SmartCredit.com, compares rewards programs to a buffet. "You'll have one person who eats a lot and a ton of people who aren't going to eat close to $7.99 worth of food, and those people balance out the bigger eaters," he says. If you carry a balance on a rewards card, you're essentially subsidizing your own rewards and the rewards of other cardholders.
3. Avoid chasing rewards. For some consumers, rewards cards create an excuse to spend more in the pursuit of miles or points. That can lead to financial trouble if you're not able to pay the balance. Stubbs suggests treating your credit card like a checking account. "Watch that account closely," she says. "If you're way over half your budget and it's mid-month, you know you need to rein in spending. When you're getting ready to check out, ask yourself, 'would I be comfortable putting this on my debit card?'" If the answer is no, then you may want to rethink the purchase.
4. Cover expenses for a group. Planning a group restaurant outing or vacation? Charging those expenses and getting reimbursed could help you earn rewards faster. Stubbs has employed this strategy herself. "My husband and I take a vacation with another couple every year," she says. "I always book everything using my main rewards card and let them give me cash." The key with this strategy is only using it with people who can be trusted to pay you back promptly and spending the cash wisely. You'll also save a trip to the ATM.
If you work for a company that processes expense reports in a timely fashion, you could also charge business expenses and file for reimbursement. "That's going to depend on the employer," says Ulzheimer. "Some process reimbursements quickly, some don't, but you don't want to give your employer an interest-free loan."
5. Set automated payment to your rewards credit card. Making reoccurring payments like insurance premiums or gym memberships on a rewards card lets you earn points on purchases you'd make anyway. Ulzheimer does this himself, but urges consumers not to set and forget auto payments. "Be diligent to make sure there are no errors," he says. "Sometimes with auto bill, consumers tend to get lazy and they don't check for duplicate charges or incorrect amounts."
If your county accepts property taxes via credit card, that payment could help you earn points, but some places charge a convenience fee for credit card payments, so Ulzheimer suggests doing a quick assessment to make sure that the payoff offsets any fees.
6. Understand how to redeem points or miles. Earning rewards does you no good if you never actually use them. "A lot of times, people don't watch their expiration dates and end up losing points," says Stubbs. If your card has a deadline attached to rewards (for instance, some airline miles expire after five years), make note of the deadline and redeem your miles before then. Also make note of any redemption fees or blackout dates. You can trade points or miles on sites like Points.com, but you'll generally lose some of the value in the process.