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How to Spot Bad Rewards Credit Cards

July 10, 2013
Credit Cards
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Not all rewards credit cards are as, well, rewarding as we’d like them  to be. Sleek, shiny designs and flashy advertisements are good at making subpar products seem desirable. If you’re not a credit card nerd, it can be difficult to sort through the somewhat confusing clutter of terms and conditions to find a halfway decent product. Don’t get sucked into a maelstrom of misleading promo deals and catchy slogans. Here are 5 clear indicators of an inferior rewards credit card.

1. Rewards under 1%

The standard base rate for most rewards credit cards is 1% back on all purchases (usually with bonus categories thrown into the mix). A card that earns less than 1% is not worth your time.

Determining the percentage back is not always as simple as it seems. Usually, you can count on reward points being worth a penny apiece, meaning one point per dollar spent equates to a 1% return rate. This is not always the case. Sometimes points are worth considerably more. Sometimes points are worth considerably less. This is vital information when calculating the rewards percentage. (NerdWallet’s credit card finder crunches the numbers for you.)

Also be wary of cards that start you at a low rewards rate, promising a higher rate after you hit a certain spending threshold. The Sam’s Club credit card, for example, only yields 0.38% back on the first $3,000 spent annually and 1% for every dollar beyond that. You deserve at least 1% from the very first dollar.

2. Reward caps

Another undesirable characteristic is the implementation of rewards caps. Rewards caps will not always affect you, but you need to know the limits before signing up. The Chase Freedom, for example, imposes a $1,500 cap on 5% earnings every quarter. Many people will never spend that much in the specified categories anyway, but it’s important to realize your true earning potential before applying. Don’t cheat yourself out of rewards. Many, many cards offer unlimited earning (though bonus categories often do have caps).

3. Limited redemption options

What’s the point of earning rewards if they have no relevance to your life or preferences? Pick a card that offers rewards you actually enjoy. Cash back is always a smart route. However, not all cards that offer cash back will give you a full return rate. Sometimes, redeeming for cash is penalized with a lower percentage returned. Your credit card may advertise 1% rewards, but that could mean 1% when redeemed for gift cards and 0.8% when redeemed for cash.

Be careful with hotel and airline credit cards as well. You may be limited to redeeming for flight with one specific airline or stays at one specific hotel chain. You can achieve much greater flexibility by opting instead for a general travel credit card that doesn’t restrict you to one particular service. For example, we’d recommend the Capital One Venture over the United MileagePlus Explorer card any day.

4. Signing bonuses under $100

Maybe this is getting greedy, but most quality rewards credit cards will offer some sort of signing bonus. A common bonus is $100 (or 10,000 points in most systems) when you spend a certain amount of money within the first few months. Be skeptical of cards that offer less than $100 (though once in a while the ongoing rewards rate is fully worth a smaller bonus).

5. Useless bonus categories

This goes back to choosing a card that fits your spending patterns. A card might offer 5% cash back in certain categories, but if you never spend money within those categories, using that card does little for you. Using the Chase Freedom as an example, during the summer months cardholders get 5% back at gas stations, theme parks and Kohl’s. A family who spends the summer driving to and from theme parks could get a lot of use out of the Freedom during those months. On the other hand, a person spending the summer working in New York City, using public transit to get around, will never tap into those 5% categories.