Choosing a Credit Card: Cashback, Miles, and Points

I’m sure all of us have gone out to dinner with a big group and sometimes have that awkward feeling when the check comes. Is that annoying girl who only ordered salad but drank more wine than everyone gonna try and protest splitting the bill? We all hate that. But then there is that other girl, who always wants to pay with a credit card. Sometimes, she even takes other people’s cash and puts their portion on her card.

Sketchy? A little. Savvy? Yes.

After all, if you were going to pay cash, you shouldn’t really care if she puts your part on her card. But, what exactly is she up to?

She’s probably earning cashback, points, or miles (or Mommy and Daddy are paying the bill and she just wants the cash). For those of you with a credit card or planning to get a card, what should you be looking for when signing up for a card?

Getting rewarded for credit card use is only for people who plan to pay off their entire balance each month. (If you don’t plan to pay of your balance each month, then don’t apply for a new credit card.)

Rewards cards come in a few major types:

Cashback

Cashback cards traditionally return to you a standard percentage of your charges, usually in chunks of $50 or $100. For example, the Citibank Dividend card gives you 1% back on all purchases – this is fairly standard among cashback cards. This card also gives you 5% cashback on groceries, gas, and pharmacy purchases.

Some cards will give you additional cashback for purchases at a specific store or other category (like purchases at the post office, restaurants, travel, etc.)

Cashback cards are a great option for those who don’t like dealing with points and other non-monetary forms of currency. They are especially great if you only use them for the bonus cashback categories. Many people will use the Citibank Dividend card, for example, only at supermarkets and gas stations.

Frequent Flyer Miles and Hotel Points

Almost every airline and hotel chain in the world now has an airline branded credit card that offers miles for purchases, usually one mile per dollar spent. Many airlines even offer bonus miles just for signing up. The Delta Skymiles American Express offers 15,000 miles when making the first purchase.

A caveat about mileage cards: frequent flyer miles are depreciating currency. Airlines are becoming stingier when it comes to redemption, allocating fewer award seats than ever before. A mileage card is probably best for those who fly frequently and really understand how the airline program works or for someone who needs the bonus miles for signing up to redeem a ticket soon.

Many mileage cards charge an annual fee, though some do not. Check the terms of the card carefully so you know how mileage accrues, when it expires, and all of the other small print. Hotel point cards usually don’t have a fee, but be sure you have something in mind about what you would use the points for.

Charity

Many charitable organizations, universities, and advocacy groups offer a branded credit card now. A percentage of your contributions is given to the organization.

It feels awful to write this, but charity-branded cards are actually not a good idea. You are better off getting a cashback card and sending those proceeds to the charity of your choice. Not only can you get a tax deduction this way, but you may also have more choice about the specific program within the organization or university you wish to support.

Other Points and Rewards

There are a whole other range of rewards cards. If you are an avid shopper at a specific store, they might offer a card where spending leads to gift certificates. Sports team-branded cards might get you invitations to special events. Whatever the card, see if the rewards are something you actually value and would use. If the terms are right, then go for it.

If you are getting points or miles or other rewards, you should try and get a card that gives you about 1.5 cents per dollar you spend in rewards. If you plan to spend $10,000 this coming year, make sure that you value the rewards from a potential card at about $150 or more.

Beware of annual fees. Be sure to subtract out any annual fee from the rewards you expect.

Check the amount you need to spend to get the rewards. If the cashback card offers you 2% back, but the minimum reward is $500, figure out if you really plan to spend $25,000 on the card. This is especially true for point cards.

Finally, do not get a rewards card if you don’t plan to pay off the balance in full each month. These cards usually have higher interest rates and fees for late payments and going over your limit.

If you are looking to sign up for a card, search the web for offers. Check the airline, hotel, and stores you use most to see if they offer a branded card. Carefully look at the terms and conditions, and see if you actually value the rewards before you sign up.

Even if you don't have a rewards credit card, making charges and paying them off helps to build a good credit history. So next time you're out with a group of friends for dinner, if someone is being annoying by using a credit card, throw yours in too.

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