People who charge everything

Many cards have caps, tiers and other limits. Several cards that offer 2% to 5% back on certain purchases also limit the annual rebate or reward you can earn to $300 or so. That means big spenders have to monitor their rewards and be ready to switch to other cards when they hit their limits. Other cards require substantial spending before their best deals kick in. American Express Blue Cash, for example, offers a rebate of just 1% on gas, groceries and pharmacies, and 0.5% on other purchases until you've spent more than $6,500. Only then does the rebate rise to 5% on gas, groceries and pharmacies and 1.5% on everything else.

Chasing rewards can hurt your credit. Just applying for a card can ding your all-important credit scores by 5 points or more, and the application can affect your credit for a year or so (see "Weird stuff that hurts your credit"). That's why Fair Isaac Corp., which created the leading FICO credit-scoring formula, advises consumers to apply for credit "sparingly." You certainly don't want to apply for a credit card while you're in the market for major borrowing such as a mortgage or an auto loan; wait until your loan closes before you add a card to the mix. Also, closing old accounts isn't advised if you're trying to improve your credit because shuttering credit cards can ding your scores.

Finally, watch your balances. You don't want to max out your cards, or even come close, because using up your available credit limits can have a big negative effect on your scores. It doesn't matter that you pay your balance in full; the only balance that matters, for credit-scoring purposes, is the one that's reported to the credit bureaus, which is typically the balance showing on your last statement. If you regularly use more than 30% of your available credit on a card, you should ask your issuer for a higher limit.

Chasing rewards can lead to overspending. "I think having the cards probably makes me spend more money than I would otherwise," said Stephen Berenson of Vienna, W.Va. "Having the cards obviously makes spontaneous purchases easier, and the points probably do provide an incentive to spend more."

Not that the Berensons are in bad shape financially. They always pay their balances in full, they're maximizing their 401(k) contributions and they have prepaid for two years of college for each of their kids, ages 13 and 15. But still Stephen worries.

"I often think we might be further along in reaching our long-term financial goals if we were more prudent with our credit card usage," he said. "Forgo the credit card benefits and just save more of the money we earn."

Other rewards chasers say they're just charging the money they would have spent anyway. Just remember: A $5 rebate is no bargain if you're spending $100 unnecessarily to get it.

9 keys to the best rewards

If you're interested in finding the best rewards card, you'd be wise to do the following:

See how much you spend. Review your credit card statements for the past few months to see what you're spending in categories such as entertainment, travel, groceries, etc. If you use personal-finance software such as Money or Quicken, you can quickly summarize your spending using the "report" features.

Review your current cards. A visit to the issuer's Web site or a phone call to customer service can help you find out what rewards programs are available and if they're running any promotions. You can ask if there's a better program based on your spending; you may be able to switch over the phone.

Review your bills. A biller that didn't offer the option of using plastic a few months ago may offer it now. Even some landlords are getting into the act. Charging recurring bills -- utilities, phone, insurance, whatever -- to your cards can help you build rewards without added cost, as long as you can pay the bill in full each month and don't max out your limits.

Check out competing offers. Credit Card Tune-Up offers an interactive calculator that can help you find rewards card(s) tailored to your spending patterns, but the site only represents a tiny fraction of available offers. Other places to check include CardRatings.com, Bankrate.com and FatWallet.com.

You can do better than 1%. Getting a penny back on every purchase used to be a decent deal, but now more-generous rebate programs mean you should be averaging at least 1.5% back on your spending, said Arnold, of CardRatings.com.

Beware of annual fees. The best cash-back programs don't charge annual fees, Arnold said. A fee of $20 or $30 isn't exorbitant if you're getting hundreds of dollars in rewards each year, but you should be wary of paying much more, especially if you haven't been getting significant benefits from the program.

Limit your choices. You may be able to squeeze out more rewards by adding more cards, but you're adding complexity to your life. Every card comes with its own due dates, terms, rates and program details, all of which can change. Consumers who don't want to invest a ton of time in tracking their accounts should limit themselves to one or two cards, "certainly not over three," Arnold said. Also, consider setting up some kind of automatic payment plan to make sure at least the minimum gets paid on every card you possess. You don't want to overlook one and get slammed with late fees and damage your credit scores.

Beware of transaction fees. Government agencies increasingly allow consumers to charge taxes and other fees. Unfortunately, many of these agencies contract with credit card processors that charge fees of about 3% to process the transactions. Those fees offset and usually wipe out any rewards benefits from using cards.

Lobby your billers. If you have to pay a big bill, or even a not-so-big one, by check or electronic transfer, request that the biller add a credit card option. Not all will comply, but you may help persuade a business or utility that's been on the fence.

Columns by Liz Pulliam Weston, the Web's most-read personal finance writer, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated Dec. 21, 2007

< previous |  1 | 2 |