Rewards credit cards save you money by returning a percentage of what you spend in the form of cash, points or miles. However, there are a few unfortunate mistakes that people make with rewards credit cards that prevent them from maximizing the value of their cards.
1. Choosing the Wrong Rewards Credit Card
There are three major types of credit card rewards: cash back, points and miles. Cash back cards are usually targeted more toward everyday purchases, while points and miles cards tend to be more focused on travel (though there are exceptions). Figuring out what types of purchases you spend the most money on can help you pick the best type of card. You may even want different rewards cards for different purposes.
For example, if you shop regularly with a particular merchant or travel provider, you may want to get a co-branded credit card affiliated with that company. These cards often offer enticing rewards and benefits at their partnered merchants, but they may have lackluster rewards for other types of purchases. As a result, such a card would work better as one of several cards in your wallet than it would as the only one.
The bottom line is that your rewards cards should save you as much money as possible, so choosing a card that will not get you bonus rewards or let you redeem for top dollar on a regular basis probably won’t do the trick.
2. Not Considering Cards With Annual Fees
There are plenty of no annual fee rewards cards, and there are also some rewards cards with very high annual fees, as well as cards in between those extremes. It’s easy to assume that not paying a fee is better, but the truth is that rewards cards with annual fees can be incredibly lucrative.
You should follow one simple rule when deciding whether or not to get a card with an annual fee: If the value you will get out of the card’s rewards and benefits during an average year is greater than the cost of the annual fee, the card is worth considering (assuming its other terms are decent).
If you’re not a big spender and will only use your card occasionally, a card with no annual fee is more likely to be the right choice for you.
3. Not Redeeming Rewards Often
There are two main reasons why you should redeem your credit card rewards often. The first is that on some cards, your rewards may expire. Expiration may be tied to a certain amount of time (e.g. two years after you earn the rewards) or it may be tied to a certain period of account inactivity. Inactivity is a period during which you have not made any purchases or payments (or sometimes, rewards redemptions).
The second reason why you should redeem rewards often is rewards devaluation. This doesn’t apply to cash back rewards, but it’s important for points and miles. Your credit card issuer can change the value of your points or miles at any time. Redeeming rewards on a regular basis makes it so that if the issuer decides to devalue your rewards, only a small amount will be impacted.
4. Failing to Qualify for an Initial Bonus
Many rewards credit cards offer initial bonuses for spending a certain amount of money within the first few months (or sometimes even for making a first purchase). If you don’t meet the spending requirement within the time limit, you can miss out on potentially hundreds of dollars in value.
Before you get a rewards credit card, you should make sure that you can earn the bonus based on your normal spending habits, or a slight amount of overspending. Overspending is ok as long as you don’t overspend by more than the value of the bonus.
5. Applying When Your Credit Score Is Too Low
Many rewards credit cards are only available to people with either good credit (a score of 700+) or excellent credit (a score of 750+). However, there are still options for people with fair credit (like most store credit cards) and even bad credit or no credit in some cases.
Before applying for any rewards credit card, you should check your credit score for free to make sure it meets the card’s requirements. It’s also ideal to get pre-approved for the card if the issuer allows you to. Pre-approval doesn’t guarantee approval, but it means your odds are the highest they can be.