Shrinking Point Values
Currency traders might recognize a few signs of hyperinflation in the rewards points market. Even when credit card contracts set a fixed ratio for earning points, such as one point per dollar, issuers don't have to maintain a fixed redemption value. For instance, one travel reward card stopped offering round trip airline tickets for a set number of points. Instead, it allowed cardholders to redeem points for dollar-value travel vouchers. Not only did the new system require more points for a flight, it put cardholders on the hook for fluctuations in airline pricing.
Check your credit card reward program's terms and conditions for language that allows a card issuer to cap the number of rewards points you can earn or the number of rewards you can earn in a particular cycle. Lenders often institute an earnings cap to market a high earnings ratio as a feature for new cardholders, while discouraging aggressive reward-seekers who tend to pay down their balances every month.
Every credit card issuer seems to follow a different calendar when it comes to tracking reward points. While a handful of rewards credit cards offer points that never expire, many banks require cardholders to redeem points within a year or two after earning them. A growing number of reward programs have put reward points on rolling expiration dates, making it even harder to save up for significant rewards. Evaluate a prospective lender's reward card by estimating whether you'll earn enough points during a cycle to justify any fees.
Consumers with cash back credit cards already know the drill. Instead of letting cardholders earn a fixed number of points for every dollar spent, some card issuers have instituted spending thresholds. Some cards require you to spend a $1,000 or more per year before you can earn or redeem points. Other spending thresholds require you to maintain monthly balances, to make a minimum number of purchases every month, or to meet a minimum monthly spending amount.
Earning and Redemption Tiers
Some credit card issuers slot their cardholders into two or three participant tiers, usually based on annual spending totals. If your spending habits change, you could drop into a tier that makes it harder to get good value from your reward points. Evaluate a prospective reward program based on your current card usage, as well as on how you might use your card if your income or job status changed.
Service Charges and Redemption Fees
Taking a cue from the airline industry, some credit card companies may charge you a service fee when you redeem your reward points. Service charges can range from a few dollars for a simple gift card conversion to a hundred dollars or more for turning points into frequent flyer miles. Depending on your spending patterns, it could be cheaper to purchase some awards with cash than to combine points with service charges.
When federal regulators required banks to stockpile cash reserves in 2008 and 2009, some lenders held reward points hostage for customers who had missed payments or exceeded their credit lines. New banking regulations have moderated the financial penalties banks can impose on cardholders, but do nothing to protect rewards balances. If your credit card company can void your points after a late payment, review your lender's Web site and statements carefully. Unexpected changes to due dates can cause you to lose your reward points.
Despite these limitations, you can often find a credit card reward program that matches your personal spending habits. Read the terms and conditions carefully, ensuring that you're not spending extra money to earn rewards you wouldn't ordinarily use. Compare reward points programs to cash back cards, especially when reviewing annual fees and interest rates. And remember that a reward program shouldn't force you to tolerate poor customer service or high service fees.
About the Author
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).