Should You Be Loyal to Credit Card Loyalty Programs?

Credit card loyalty programs are so tempting—get cash, free trips and all kinds of cool stuff—for making purchases you plan to make anyway. Rewards cards aren’t a bad idea if you aren’t carrying a lot of debt (the interest you pay will easily outpace the value of your rewards) and if you pay off your balance every month (with some cards, like American Express, you forfeit points when you don’t pay in full).

But these programs are not as, well, rewarding, as the credit card issuers make them seem (surprise, surprise) to be. It pays to understand how these cards work and what you’re actually getting back before you sign up for one, so that you can judge the potential rebates against the fees, interest and other perks a card comes with and find the one that you’ll get the most out of.

Joel Ohman, a certified financial planner and president of, says that regardless of the shape they take—cash, travel, consumer items—the value of most rewards is 1% to 5% of the purchases you’ve charged. So, for every $100 you spend, you get $1 to $5 back in some form. “For most programs, it seems to be right around 1%,” he says. “If you get more than that you’re doing good and if you get less than that you can probably do better.”

credit-actGo for the Cash.

Ohman prefers cards that offer cash back, such as the American Express Costco Cash Rebate card that he carries. “It’s the most transparent deal; you know exactly what percent of your purchases you get back,” he says. “And who can’t use cash?”

But be sure to read the fine print about how the rebates are paid and when they kick in.  Some cards offer a great cash-back rate of 4% or 5% as a teaser that will drop after you’ve had the card for a little while; others step up your rates over time. For example, you might earn only 0.5% back on the first $5,000 you charge and not earn the 5% rate that was advertised until you’ve charged $25,000 or so, which could take a while (because we know our readers aren’t big spenders).

Other cards offer higher rebate rates for certain kinds of expenditures, such as gas or dining out or groceries. These extras are nice but can change over time (The Discover More card changes them every quarter), so they shouldn’t be the primary thing that draws you to a card.

Some cards let you collect your rebate whenever you want to after you’ve hit a certain threshold (probably $25 or $50) and might let you apply it to your bill.  Others issue a check once a year, which means a larger reward that you can do more with, but you have to be patient.

Consider the Points.

You might believe that signing up for a card that gives you points with a particular airline will be just the thing to let you do all that traveling that you’ve always wanted to.  But somehow it doesn’t work that way. You might find the airline doesn’t let fly where you want to or that the hotel won’t let you use your points during peak travel times.

Unless you already favor a particular airline (it goes where you need to on business or where your family lives) or routinely stay in a particular chain of hotels, you might wind up collecting points you never use, or worse, that expire before you cross the first destination off your “places to go” list.

Moreover, Ohman points out that it can be hard to know the value of the rewards you’re reaping with these cards. Credit card companies seldom make their formulas known and prices for airline tickets and hotel rooms can fluctuate dramatically, making it hard to do the calculations yourself.

Skip the Rewards.

The idea of trading in credit card points for an iPad, Katie Perry tickets, or the latest kitchen gadget is tempting. But programs like American Express or Wells Fargo Rewards or Visa Extras seem to be on the stingy side.

A quick survey of the American Express Rewards catalogue showed most items to be worth about 0.5% of the purchases you’d have to rack up to get them (the exception: gift cards tended to hit Ohman’s 1% mark).  Wells Fargo’s rewards inched closer to that important 1% threshold but usually missed it and the Visa Extras fared even less well.

Shop Around.

To find a card that fits your spending patterns and compare fees and rewards side-by-side, try the tool Ohman has on his website. And, color us partial, but of course we love our LearnVest Credit Card Finder!


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