5 Tricks Credit Card Companies Use To Diminish Rewards Value

by Ryan

The following is a post from guest blogger Michael, who runs Credit Card Forum, which is a community for talking about credit card reviews, rewards, and just about everything else related to credit cards.

Let’s be honest, right now credit card rewards are more complicated than they have ever been in the past. Heck, I run a site about credit cards and even I get confused by them sometimes! Between the spending tiers, rotating reward categories, and redemption options there are many opportunities for us – as the consumer – to get the short end of the stick if we aren’t careful. In Ryan’s post about credit card education he said “a credit card can be a murderous weapon or a useful tool.” Well I think that same philosophy definitely applies to the reward programs, too – they’re either going to help you or hurt you. Below are what I consider to be the top 5 tricks they use that you need to be aware of.

Trick #1: Having to “opt-in” to earn rewards
Don’t get me wrong, I love my Discover More and Chase Freedom, but what I don’t like is that their reward programs require you to “opt-in” several times per year. If you don’t do that, you’re not going to get the higher 5% on eligible purchases.

Why do they set it up this way? Well I think most of us can guess the reason – they hope you forget to opt-in when the rewards change, and hence, saving them the payout of 5% (which in and of itself is a money loser for them). So if you use cards that require an opt-in, make sure you don’t forget to do it!

Trick #2: Being screwed when you redeem rewards
Over the last few years, literally every credit card (even those which are supposed to be strictly cash back) have started offering alternate redemption options; merchandise, gift certificates, travel and just about anything else you can think of. Are they giving you these other options to be nice? Probably not. Rather, a lot of times they do it in hopes that you choose something that costs them less.

For example, you may be able to use 10,000 points for $100 cash back, or to buy some electronic gadget. The problem with the latter is that from my experience, you’re almost always better off taking the cash and buying the gadget on your own at a cheaper price.

When it comes to gift cards, many programs change the point value depending on the dollar amount of the gift card. For example, 10,000 points might buy you a $100 gift card, but if you choose only a $50 gift card it could cost 6,000 points (20% more). Not all credit card companies play this game, but most do. The only one I know that doesn’t is Discover, because if you convert cash back to partner gift cards, the dollar value you get will always be above the value of your cash back (i.e. $45 cash back = $50 Starbucks gift card).

Trick #3: Reward caps
I remember back before the summer of 2008 when oil peaked at an all-time high, most gas credit cards had no cap on the higher rebate you earn on gas. Then of course $4+ gas prices changed all that. Now, even some of the best gas credit cards have rather low caps on the amount of gas that will qualify for higher rewards. However there are a couple that don’t, like the gas card from Pentagon Federal Credit Union that still gives 5% without any caps!

But it’s not just the gas rewards you have to be wary of. From my experience the vast majority of cards that offer higher rewards on specific categories of spending will cap them. I remember back in the day, I use to make out like a bandit with my Chase Freedom that gave an unlimited 3% on the top 3% categories of spending. With no caps, I was really milking that baby. However the rewards program has completely changed since then and now there are always caps on the higher reward categories.

Trick #4: Sign-up bonuses too low to redeem
This trick is mostly used by travel credit cards. They lure you in with a big, fat sign-up bonus of 25,000 miles or more. So you sign-up for the card to get a free flight, only to realize that your specific destination is going to cost a heck of a lot more than 25,000 miles. I bet Ryan would encounter this problem flying from his home in Hawaii to parts of the continental United States.

But this really poses a problem for those who are small spenders and were planning on canceling the card before the first year was up (to avoid the annual fee charged on year two). Now, the clock is ticking and they either have to (a) spend a crap load to earn the points in time, or (b) suck it up and pay the annual fee during year two if that’s how long it’s going to take them. This is why you need to carefully contemplate these offers beforehand.

Trick #5: Much higher interest rates
For starters, I should say that if you carry a balance, rewards should be the last thing on your mind. You should be focused on paying off your credit card debt at the cheapest interest rate possible, as quickly as possible.

With that said, it’s important to point out that the best reward credit cards usually have some of the highest interest rates, too. So even if you carry a balance for just one billing period, the amount of interest you pay will likely offset the value of any rewards, possibly the value earned over several months combined. In summary, reward cards are a waste if a balance is carried.

How do you feel? Are these tricks fair game or are the credit card companies playing dirty with us?

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{ 2 comments… read them below or add one }

Delena Silverfox@Coupon Codes March 2, 2011 at 6:14 am

Credit card companies are not interested in the rewards they offer; it’s just the carrot they wave in front of our faces so we don’t notice the huge stick they’ve got behind their backs. They’re interested in the interest rates we have on our cards, because it’s money in their pockets. What money do they make if they gladly and freely hand out rewards, rather than making us jump through hoops or diminish the value of their payout?

Businesses, especially credit card businesses, are in the business of making money. Reward programs cost money.

Delena
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ElleX March 6, 2011 at 7:51 pm

There are credit card companies that are playing dirty with us and the best defense to not use the ones that are. I have two cards that I really like…Discover and my credit union Visa. The others I don’t care if they close my accounts or not (for non-use).

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