We often report on the credit-card industry’s anticonsumer practices: high fees, unexpected interest-rate hikes, and difficult-to-understand terms. In this ugly economic climate, many cardholders are facing tightened credit lines and jacked-up interest rates, even as issuers prepare to comply with new federal rules that curb some of their most egregious practices (see A long awaited relief).
But other consumers, specifically people who never carry a balance and always pay their bills on time, can actually make their cards work for them rather than against them. Despite the tough economy, some cards still offer good cash rewards. Though some issuers are cautious about giving cards to new customers due to fears about their creditworthiness, and some rewards programs have been scaled back, card companies are competing to keep their existing customers and entice them to charge more.
We looked at dozens of cards to find a handful that offer worthy rewards with no annual fees. (See The best cash-back cards.) We also compiled eight strategies for picking the right cards and getting the greatest benefit from them. But a word of caution: Cash-back cards, which generally carry higher interest rates than the lowest-rate cards that don’t pay rewards, can spur some consumers to spend more than they should. If you carry a balance, you’ll pay interest charges that could negate whatever rewards you get—and then some. So these cards and tactics make sense only for the most disciplined credit-card users. Here are some tips for getting the best rewards.
A few cards require that you call the issuer to request your rebate, while others automatically send it to you when you hit a certain threshold. Still others, like Blue Cash from American Express, credit your account at the end of the year. Either way, you should look for a card that gives rewards without any prompting from you.
Some cash-back cards give you a flat amount based on all your purchases regardless of how much you spend. Others have tiers with different levels of rewards depending on how much you spend and where you spend it. Amex Blue Cash offers 1 to 5 percent cash back for purchases at supermarkets, gas stations, and drugstores, and 0.5 to 1.5 percent cash back for purchases everywhere else. But the 5 percent reward and the 1.5 percent reward kick in only for new purchases made after you’ve already spent $6,500 in a year.
So if you don’t generally spend that much, you’d be better off using a card like Capital One No Hassle Cash Rewards, which gives 2 percent cash back on gas and groceries and 1 percent for other purchases, regardless of how much you spend. Also look for a card that doesn’t limit the amount of rewards you can earn in a year (Capital One No Hassle and Amex Blue, for example, have no limits).
Instead of paying cash, use your rebate cards for most of your shopping to get the most cash back. Supermarket and drugstore purchases often earn rewards at a higher rate than some other categories of spending. But be careful: People tend to spend more with rebate cards, so be sure to stay within your budget. And if there’s a discount for paying in cash, like some gas stations offer, use cash.
Charles Schwab recently introduced a card that gives 2 percent rewards that are deposited into a taxable investment account. Fidelity has a card that offers 2 percent rewards and puts the money into an Individual Retirement Account. Fidelity offers other cards that deposit rewards of 1.5 percent into a regular brokerage account or a 529 college savings plan. Both the Schwab and Fidelity cards have no annual fee and no limits on the amount of cash you can earn. Schwab, however, charges a $50 transaction fee to buy many low-cost mutual funds, like those from Fidelity, T. Rowe Price, or Vanguard. (The broker also offers 2,000 other funds with no transaction fee.) So if you prefer Fidelity’s mutual fund offerings, you may want to go with its card.
Small-business cards often pay better rewards than consumer cards. And many of the cards are available to people who don’t think of themselves as businesses. If you do freelance work or even sell things over eBay occasionally, you might qualify. You can apply for them using your Social Security number, not a business ID number. Advanta offers a card that gives 90 days interest-free on all purchases for as long as you hold the card. Another gives you double points in three categories you choose and 25,000 bonus points after your first purchase, equal to $250 in cash back.
Rewards cards that pay points that are redeemable for other purchases are less generous than cash-back cards. “In this environment, it’s more cost-efficient for card companies to offer cash-back programs because points programs require more paperwork and the hiring of an administrator to run the program,” says Curtis Arnold, publisher of CardRatings.com, a Web site that lets you compare credit-card offers. “Cash-back programs are cheaper to run, so card companies can be more aggressive with the rewards they offer.” Many cards will now let you take your rewards as cash or points.
With some airlines in precarious financial condition, a card that gives you miles or points might be useless if the company goes belly-up. Airlines are also getting tougher about blackout dates, and some have raised redemption fees and the minimum point requirements for round-trip domestic flights. The best tactic is to get a credit card with a great sign-up bonus and then cancel it after you earn a trip. And book the trip as soon as you’ve earned the points. One example: After your first purchase, the AirTran Visa card gives you enough reward miles for a free one-way flight, saving maybe $250 even after accounting for its $39 annual fee. Cancel the card after you earn the trip.
If you are enrolled in a frequent-flyer program, you can often get a credit card affiliated with the same airline that will give you an introductory amount of miles, which you can combine with your existing frequent-flyer points.
If you fly on a lot on different airlines, you might prefer a good cash-back card, and use the cash rewards to pay for flights you find on discount airline Web sites. If you’re set on having an airline points card, American Express Blue Sky is worth considering. You earn one point for every dollar spent and you can cash them out each time you rack up 7,500, which is good for up to $100 in savings. You can use points for flights, hotels, cruises, and car rentals. There is no cap on points, they never expire, and there are no blackout dates.
This is an aggressive move that might make sense for people facing large purchases that might not be paid off at the end of the month. You open a card with a no-interest offer for 12 months, make the large purchase with it, and earn the cash-back rewards for that purchase. At the end of the 12 months, you can transfer that balance to a card offering a no-fee, no-interest balance transfer for six months, such as the Pulaski Visa Classic card, which also has a low 6.5 percent APR. So if for some unforeseen reason you can’t pay off the loan within those 18 months and forget to transfer the balance to another no-fee balance transfer card, you’ll at least be paying it at a not-too-exorbitant rate. You might, in fact, be able to finance something, like school tuition payments or home renovations, at a better rate than a private loan might offer. Many cards limit how much you can charge per day, so you can ask the merchant to break up a large purchase over a few days.
Note: All rates, rewards, and other terms current as of early 2009. Credit-card rates and terms change frequently.
This article was also published in Consumer Reports Money Adviser. Subscribe now to get more expert financial advice you can trust.