Credit card rewards programs: Pros and cons

Almost every day, I’ll get an email or two from a reader wanting me to evaluate a particular credit card with a rewards program associated with it.

“Is the Chase Amazon card a good deal?”

“Does that Target Visa really pay off?”

“Is the points program on this card better than the points program on this other card?”

Here’s the deal: the same exact set of ideas govern how I would answer all of these questions – and many more questions like them. It also governs how I handle my own reward credit cards.

Ready?

It doesn’t matter what rewards card you have if you’re carrying a balance. Let me repeat that. The reward program for your card doesn’t matter at all if you’re carrying a balance on it. What matters in that case, far above all else, is the interest rate on the card.

Ideally, you’ll never carry a monthly balance on a credit card. That’s what I’ve managed to do for the last several years, to my own relief. A balance on a credit card means that you’re going to be paying interest to the credit card issuer at an interest rate designated by them. You don’t want to be doing that, because that interest rate is often a painful one.

However, I know that many people do carry balances on their card. If you’re in that boat, the number one factor you need to be looking at – by far – is the interest rate on your card. The rewards program is of tiny consequence next to the interest rate. A card with no rewards program that offers a 7.9% APR is far better than the best rewards program out there on a card that has a 14.9% APR if you’re carrying a balance.

Once you’re past that step and aren’t carrying a balance on a card, it’s worthwhile to note that the best rewards program is the one that’s effortless for you. In other words, it’s the one that most closely matches what you buy and where you buy it.

For example, if your grocery store that you shop at every week has a credit card offer, it should go right to the top of your list, simply because such a card will often offer in-house rewards that will defeat almost anything else you can get. If your gas station that you always fill up at has a credit card offer, you’ll want to look at that one first, too.

It’s not too hard, with the right card, to get a 6% or 7% return on your card use (assuming, of course, you pay off your balance in full each month).

I’ll use a simple example. Let’s say you do your grocery shopping, department store shopping, and pharmacy business at your local Super Target. The Target Visa gives you 5% off on all purchases. On top of that, when you fill ten prescriptions using that card, you receive an additional certificate giving you another 5% off of your purchases for a single day. With some planning, that’s easily going to be 6% off your spending at that store. (However, it doesn’t save you a bit when shopping elsewhere.)

There are many similar cards tied to specific retailers. For example, if you live in an area where your local BP station offers the best gas prices, a BP Visa card will give you a 5% rebate on all gas purchased there.

The rewards on cards like these, when matched with a retailer you already use, is far ahead of the rewards you can get on non-specific cards. The advantage with cards like these is that you don’t have to do any planning or any extra purchasing to get the rewards. They’re just already in line with what you do.

What if you truly don’t have any cards available that match your regular retailers? To be honest, most of the non-specific programs are pretty similar. The best ones offer a reward of around 2% of your purchases and sometimes include a small signup bonus (some include a larger signup bonus, but with restrictions).

This brings me to my third point. No rewards card is worth buying stuff you wouldn’t already buy. If you have to make qualifying purchases, start shopping at a different store, or have to spend a specific amount each month, just skip the program. The cost and effort associated with having your spending dictated by a company exceeds any rewards.

So, if you want to find the best rewards program, do three things. First, don’t carry a balance on your card or else you’re just wasting your time. Second, choose cards in line with how you already shop. Third, avoid cards that require you to buy more stuff or shop in different places. If you follow these three guidelines, you’ll quickly arrive at the right rewards card for your situation.