Should I Get a Rewards Credit Card?

Used properly, rewards credit cards can provide some perks.

Credit cards are a fact of modern life. Without one, it's difficult to rent a car, purchase a plane ticket or get a hotel room. Even if you rarely use the card, opening an account can help build your credit history and provide access to some money in case of an emergency. Most credit card companies entice customers to choose one of their cards with rewards programs, offering everything from airline miles to cash back.

Airline

Airline mile rewards cards are one the most common types of cards. Often offered in conjunction with a particular airline, you earn a specified number of miles towards a ticket on that airline for your purchases. Some types of purchases, such as gas or groceries, may earn more miles. In general, you can earn anywhere from one to 10 miles per dollar spent. Once you have enough miles, theoretically you can jet off to Tahiti or any other destination of your dreams. But no so fast. Most airlines have restrictions on when you can use your miles, and flying to destinations outside the continental United States require more miles -- up to 100,000 or more -- so that dream vacation you "earned" might cost you $100,000. You may also have to pay hefty fees to use your miles, either to the card company or the airline.

Cash Back and Points

Cash back or points rewards are another common type of reward card. For each purchase, you get a cash rebate, usually around 1 percent of the purchase amount, deposited into an account. These accounts can be savings accounts, or designated for college savings or even a charity, and may pay interest. Points-based rewards cards work the same way as airline miles cards. For each purchase, you earn a designated number of points, and once you have accumulated enough points, you can trade them in for merchandise. Like airline cards, there may be fees associated with using your points.

Advantages

If you're spending money on your card anyway, a rewards card may be a good choice for you --- especially if you pay your balance in full each month. Using your credit card to cover all of your expenses is a good way to build a stockpile of points or miles for a future trip or purchase. Some rewards cards also offer cardholders perks that are unavailable to other customers; for example, a card associated with a hotel chain may offer cardholders opportunities to earn free nights through special promotions. Many cards associated with travel offer new customers perks to enroll, such as free airline tickets or hotel nights when you use the card the first time.

Disadvantages

The major drawback to rewards credit cards is the amount of time it takes to earn a reward. Unless you spend a significant amount of money on your card, it could take you years to earn a reward. In addition to fees to use the rewards, you might have to pay a hefty annual fee for the card; always check the annual fee, interest rate and terms of any card before signing up. Also check for restrictions on using your rewards. In some cases, your rewards may expire if you don't use them by a deadline.

References

• Bankrate: Are Cash Back Cards Still a Good Deal?; Leslie McFadden; 2011
• Bankrate: Banks Push Rewards Cards; Lucy Lazarony; Jan. 2011
• Motley Fool: Get it Done: Rack Up the Rewards; Dana Yoachim