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How to Analyze Credit Cards Reward Programs

Credit card companies are always competing for “share of wallet,” that is a piece of your spending pie. They will offer new account bonuses to entice you to sign up. They will give you reward points of cashback to entice you to keep using their card. They’ll throw out low introductory interest rates to make spending your money a little easier.

As consumers, you might think it’s easy to compare offers. If someone offers you 1% and someone offers 2%, the 2% is better right? Not necessarily. In the world of reward programs there are two sides – the earning of points and the spending of points. It’s very easy to only focus on the earning of points and assume that spending it will be easy. As some travel credit card holders have quickly learned, sometimes spending it isn’t as easy as it seems.

Rewards Structure: Cash, Points, Miles

When it comes to actual rewards, you have three options:

Reward Accumulation

Reward accumulation refers to how you accumulate cash, points or miles. For the purposes of this discussion, we’ll treat all reward credit cards as if they awarded you points.

Reward Structure: The first thing to look at is how many points you earn per dollar spent. Cards will offer, as incentives, a special schedule of rewards. For example, the Chase FreedomĀ® Visa – $50 Bonus Cash Back [3] earns cash back at 1 cent per $1 spent, 5 cents per $1 spent on special categories that change. Sometimes you’ll earn 5% on gas, sometimes it’s at the supermarket.

Next, a credit card may cap the rewards you can earn in one billing cycle. The Chase Freedom(SM) card has unlimited cash back rewards but other cards may cap it at a point or dollar level each month. This can significantly impact your rewards if you plan on putting all purchases on one card.

New Account Bonuses: Credit card companies are always competing to get into your wallet or purse, so some may offer new account bonuses. This is a common practice for travel credit cards as you can earn 25,000 or 50,000 miles after spending a certain amount within a period of time. With travel cards, be aware that many have annual fees and this new account bonus is, in part, a reward to offset that fee.

Sweeteners: Sweeteners are non-spending related ways you can extra points. For example, the Citi Forward [4] credit card will give you 100 ThankYou points every billing cycle if you stay under your limit and pay your bill on time (Citi Forward Review [5]). That’s a nice sweetener.

Point Expiration: Most programs no longer put a time limit on the points you accumulate, but you need to check to be sure. Some airline credit cards will expire your points if you stop accumulating them or don’t spend them. If you do fall victim to this, it often just takes a phone call to get the points reinstated (though it’s best to avoid this in the first place).

Analyzing Catalogs

Points are great but the key to understanding how “good” a credit card reward program is requires a close look at what you can get with those points. I could give you 1,000 points per dollar spent but if everything cost millions of points, it makes no sense. 25,000 miles sounds awesome, that number is huge, but has no meaning until you find out how much a domestic round-trip ticket costs, what flights you can use it on, and blackout restrictions. The key isn’t in the accumulation of points or miles, it’s in the spending of those rewards.

I’ve taken a look at some of the big catalogs:

In each review is an analysis of the rewards you can get, the effective “value” per point, and how each system works. I tried to make an apples to apples comparison, converting points into gift cards, as most conversion rates for physical products are very low. With a penny per points as a baseline, you can almost always find products for less in a store like Amazon.com.

Point Inflation & Reward Expiration

Finally, I want to bring up one important point that many people, myself included, overlook. As you accumulate your points, it’s important to keep in mind that you need to spend them as well. What costs 5,000 points today may cost more tomorrow. An offer that exists today, may not exist tomorrow.

A prime example of where I got caught was with Citi ThankYou reward points. For years I’ve been converting them into student loan payments at 1 penny per point. 5,000 points equals a $50 check to my student loan servicer. When it comes to “cash equivalents,” like a gift card, the typical conversion is 6,000 points to a $50 gift card. Then, a few months ago, the student loan payment was removed, without notice (they are not required to give notice, nor do I expect it), and I had 15,000 in points originally intended to go towards my student loans.

I hope this guide, which turned out to be much longer than I originally intended, helps you analyze credit card reward programs. If there is something I missed or a factor you take into consideration, please share it with us in the comments!