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Best credit cards that pay rewards

We've pored through tons of fine print to find the good ones

Consumer Reports Money Adviser: June 2010

Comparing rewards credit cards hasn't gotten any easier, despite the new federal consumer protections that went into effect earlier this year. In fact, if you're looking for the best credit card that pays rewards, such as cash back, air miles, or points, you'll need to factor in a lot of variables, including the type of rewards you want, where you shop, how much you spend, and whether you're willing to pay for a customized program.

"There's been a trend to introduce new rewards cards and put new bells and whistles on them, including up-front rewards as incentive to sign," say Bill Hardekopf, CEO of LowCards.com, a Web site that compares credit cards. "But in some cases they introduce those cards with annual fees."

Depending on the card and your spending patterns, you might make up for the annual fee through the rewards you get. But if you carry a balance, be aware that rewards cards tend to have higher interest rates than standard cards and that you could end up paying more in finance charges than you're getting back in rewards. So these cards are best suited for people who pay off their balance in full each month.

To find the best rewards card, you'll need to read a lot of fine print. We've done some of that for you, but credit-card terms change frequently, so you should go to card-issuer Web sites to check for updates. Here are some other steps to help you navigate the new landscape of rewards cards.

Fees and more fees

About 20 percent of credit cards have annual fees, typically about $50. But watch out for other less-obvious fees. In a recent national survey by the Consumer Reports National Research Center, 37 percent of respondents said they had rewards cards, and among them 19 percent said that over the past 12 months their card issuers had increased fees for balance transfers, cash advances, or foreign transactions. "Issuers have realized they can either increase annual fees and turn people off, or nickel-and-dime people where they don't notice it," says Curtis Arnold, publisher of CardRatings.com, another site that lets you compare card offers.

The trade-off for higher fees is that cards can be customized to match your spending habits; you can mix and match the fees and reward point levels. For example, the new Capital One Venture card offers two versions: one with 2 miles per dollar on all purchases and a $59 annual fee (waived the first year), and another with no annual fee that awards 1.25 miles per dollar.

The terms you get might depend on which promotion you respond to. So hold on to offers that come in the mail. One of our staff members received four solicitations for a Citi Gold AAdvantage World MasterCard within about a month. Each offered a different level of points, from 25,000 to 35,000, after meeting certain requirements. They all had annual fees; some were waived in the first year. But an offer for the same card on Citibank's Web site wasn't as generous. So if you learn of an offer you'd like—or have received a better one in the past—call the card issuer and try to negotiate for those terms. It may not work but it doesn't hurt to ask, especially if you have been a good customer and you have good credit.

Some cards charge an annual fee to people with lower credit scores. For instance, Capital One No Hassle cards are fee-free to people with excellent or good credit but cost $39 a year—with a higher APR—to those with an average credit score. So once you're approved for a card, read the terms before activating it to make sure you weren't given a version you don't want.

Cash back, points, or miles?

It's easier to figure out exactly what you'll earn with a cash-back card because you don't have to calculate the value of points or miles. And you can use cash however you want. For example, if you want to earn travel rewards but you don't fly a specific airline regularly, you may be better off getting cash back and then shopping for the best prices on airfares. And with a cash-back card, there may be less temptation to spend points on things you don't need at the online "malls" that card issuers run, or to overpay for something using points.

Among the cash cards, American Express Blue Cash Back is one of the best, but you have to be a big spender to get the highest level of rewards. It pays 1 percent back on gas, groceries, and drugstore purchases and 0.5 percent on everything else until you've spent $6,500 in a year. Spending beyond that earns you 5 percent and 1.25 percent, respectively. It has no annual fee and comes with purchase protections and extended warranty coverage.

Cash-back cards marketed by investment firms are worth a look, too. Fidelity Investments offers a 2 percent cash-back AmEx card with no annual fee and a Visa with 1.5 percent (2 percent once you cross $15,000 in annual spending). The Fidelity card requires that you open a linked brokerage account to get cash rewards.

Airline and travel

Many people bank their miles over several years with the hope of getting tickets for their dream vacation. But the best strategy depends on whether you earn your miles through frequent flying or frequent spending. If you are a frequent traveler, you'll want to choose a specific airline credit card that augments the miles you earn on the routes and carriers you regularly fly. If you accumulate miles through spending, you might be better off with a card that gives you cash back so you can buy your own tickets without restrictions. Or get a general points card that lets you convert points to airline tickets.

Airline cards allow you to combine points with miles you've earned through their frequent-flyer programs, and most offer 25,000 to 35,000 points up front—enough, they say, for a round trip. But if you sign up for the free miles and then close the account, your credit score could be adversely affected. And bear in mind these "free flights" might not be so free.

"If you have 25,000 miles from an airline you can get a restricted domestic coach ticket, but you are up against capacity controls imposed by the airline," says Tim Winship, publisher of FrequentFlier.com. "They allocate a limited number of seats for rewards use." So you might have to use more miles, take a red-eye, or travel on a different day to get to your desired destination. Winship says an unrestricted ticket might cost you up to 50,000 miles.

On the other hand, 25,000 points on a bank credit card is enough for a round-trip coach flight, and you can choose from dozens of airlines without capacity restrictions. The one restriction is that you must book your flight 14 to 21 days in advance. Some American Express cards let you combine points with frequent-flyer miles, which can help you reach your goal quicker.

The AmEx Starwood Preferred Guest card is a good hotel/air card if you often stay at Sheraton, Westin, W, and others in the Starwood chain of 940 hotels. You'll earn one point per $1 spent on eligible everyday purchases and double points at Starwood hotels. The 10,000 points you earn with your first purchase is enough for three free nights with some restrictions. The card also lets you transfer miles to more than 30 frequent-flyer programs. And, unlike some AmEx cards, there's no fee for transferring points. You also get an extra 5,000 points for every 20,000 you transfer. The $45 annual fee is waived for the first year. If you stay at Hilton Hotels, take a look at the AmEx Hilton HHonors or Citi Hilton HHonors Visa.

If you're loyal to a certain retailer, see if it has a credit card with a good rewards program. Many retailers offer cobranded Visa, MasterCard, or AmEx cards that let you earn rewards for all your purchases and give you a sign-up discount and access to special sales. Retailer cards carry notoriously high interest rates, so they aren't suitable for people who carry a balance.

The Amazon.com Rewards Visa card, for example, has no annual fee and pays $30 back on your first purchase; 3 points for every $1 spent on Amazon.com; 2 points for every $1 spent at gas stations, restaurants, and drugstores; and 1 point for every other $1 spent. Points are unlimited, never expire, and can be converted to cash.

The very fine print

Buried deep in the terms and conditions of some credit-card agreements are clauses that could make you lose out on points or cash back. For instance, Discover offers only 0.25 percent rewards at warehouse or discount stores, including Walmart, rather than its standard reward of up to 1 percent.

The Chase Freedom card, included in our table, is good overall, but the categories for the 5 percent cash rewards rotate on a quarterly basis, and you need to opt-in every quarter to receive them. The other tricky thing about the card is that the rewards are designed to match up with seasonal products. But if you don't have a home-improvement project planned for the spring, you may not rack up quite as many points as you might have hoped.

Other cards may cut off your rewards after you reach a certain amount in monthly spending in a given category, like gas or restaurants. Also look out for how cards determine how much you can buy with points. Having 25,000 points with one card may not be the same as another.

Rewarding terms from small issuers

We've recommended standard credit cards from some small banks and credit unions for their low interest rates and consumer-friendly terms. But some offer decent rewards as well.

The PenFed Visa Platinum Cashback Rewards, from the Pentagon Federal Credit Union, gives 5 percent cash back on gas purchases at the pump. That's the best gas offer out there; 3 percent is the norm. You can join by paying $20 to the nonprofit National Military Family Association and opening a regular share account with at least $5. Military members and their families, certain government employees, and Red Cross employees and volunteers are eligible for free PenFed membership.

Other small banks and credit unions offer cards with moderate rewards, but they can be great options if you carry a balance. You can find interest rates around 9 percent, no annual fee, and pro-consumer terms and conditions, and still receive 1 percent cash back or points on all purchases.

IberiaBank, Simmons First Bank, and USAA all have cards that fall in this range, with USAA paying 2,500 points with your first purchase. The Navy Federal Credit Union's cashRewards card offers 1 percent rewards that jump to 1.5 percent after you've spent $10,000 in a year. Like USAA, it's restricted to current and retired military members and their families.

Plastic that pays you

With the help of CardRatings.com, LowCards.com, and FrequentFlier.com, we examined the terms of many rewards credit cards to find the best available. None of the cards below limits the amount of points, miles, or cash back you can earn, and none charges an annual fee in the first year. Cards are in alphabetical order.

 

Card APR Features
Amazon.com
Rewards Visa
13.24%,
18.24%,
or
21.24%

$30 back after 1st purchase. 3 points per $1 spent on Amazon.com; 2 points per $1 at gas stations, restaurants, drugstores; 1 point per $1 elsewhere. Points are unlimited, never expire, and can be converted to cash.

American Express
Blue Cash
0% for 6 mo.,
then 17.24%
to 21.24%

Until $6,500 in annual spending, 1% cash back at supermarkets, drugstores, and gas stations, 0.5% elsewhere. Above $6,500 in spending, rewards bump to 5% and 1.25%.

American Express
Costco TrueEarnings
0% for 6 mo.,
then 15.24%

3% cash back at gas stations (1% after $3,000 is spent) and restaurants, 2% on travel, 1% elsewhere. No annual fee with Costco membership.

Capital One No Hassle
Cash Rewards
0% until
March 2011,
then 14.9%

2% cash back on gas and groceries at major supermarkets, 1% on everything else. Rewards never expire and can be redeemed at any time. No balance transfer fee.

Capital One Venture 13.90%

2 miles per $1 spent. 10,000 bonus miles after spending $1,000 in first 3 months. $59 annual fee waived in first year. No foreign-transaction fee. VentureOne is a no-annual-fee version; it pays 1.25 miles per $1 spent.

Chase Freedom 0% for 6 mo.,
then 12.99%
to 22.99%

5% cash back in rotating categories like airlines, gas, groceries, and home improvement. 1% for all other purchases. Cash back never expires.

Fidelity Rewards
American Express
13.99%

2 points for every $1 you spend. Points can be redeemed for merchandise or converted to cash and deposited in a linked brokerage account.

PenFed Premium
Travel Rewards AmEx
13.24%

5 points per $1 spent on airfare, 3 points per $1 on dining and hotels for 1 year, 1 point per $1 elsewhere. 20,000-point sign-up offer. No foreigntransaction fee. Good balance-transfer offer. $50 annual fee waived in first year.

PenFed Visa Platinum
Cashback Rewards
13.99%

5% cash back on gas, 2% at supermarkets, 1% elsewhere. Good balance-transfer offer.

This article appeared in Consumer Reports Money Adviser.

   

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