Just Rewards?

Updated on November 27, 2006.

THESE DAYS, collecting points through credit-card rewards programs is something of a national hobby. Cash back, frequent-flier miles, gift certificates: more than 55% of all credit-card offers have some type of reward attached to them, according to the latest survey by Mintel Comperemedia, a company that monitors direct-mail solicitations nationwide.

Needless to say, the rewards can be great. Every time you use your Chase Disney card, for example, at least 1% of your purchases goes into an account you can use to pay for trips to Disneyland and Disney World. You can choose a check or gift certificate for $25 every time you spend $2,500 on your Chase Free Cash Rewards card. Signing up for a rewards program seems like a no-brainer. After all, it's a free perk, right?

Maybe not. Fall into the eight traps listed below, and your rewards program could prove to be decidedly unrewarding.

1. We don't really give you 5% back
Be careful when you get a pitch for a cash-back card (a credit card that offers cash back based on the amount you spend). While these deals can be good, it pays to read the fine print.

Many cash-back cards use a "tiered" program. So while a credit-card solicitation may state that you can get "up to 5% cash back on qualifying purchases," relatively few purchases actually get that star treatment. Take American Express's Blue Cash program. Here, only "everyday purchases" (meaning spending done at supermarkets, gas stations, drug stores and the like) are eligible for the maximum 5% cash-back treatment. And even then, the first $6,500 spent (on an annual basis) gets just 1% kicked back. Only qualifying expenses over $6,500.01 get the full 5% cash back. Non-everyday expenses are subject to a significantly less favorable scale, with a maximum rate of 1.5% applied to purchases made after $6,500.01 has been charged on the card.

In other words, you're going to have to charge a whole lot of Wheaties to get the full reward. And needless to say, if you don't pay off your balance each month, you could find yourself in a world of hurt. Using a credit card to pay for basic necessities — like food — is one of the warning signs that your debt is out of control. Getting a little cash back won't solve that problem.

In other words, these cards aren't for everyone. If you don't typically charge a lot on your card, or if you know you won't use your credit card frequently at the retailers that qualify for the maximum rate, you're better off with a flat cash-back rebate program, says Curtis Arnold, publisher of CardRatings.com, a consumer credit-card information Web site. With these types of programs, you typically get 1% back on every purchase you make. Assuming you pay off your balance each month, that's like getting a 1% discount on everything you buy.

Try the 1% cash-back program with the Citi Dividend Platinum Select card (with a bonus 2% cash-back rate on purchases at gas stations, drug stores and supermarkets), which will mail you a check upon request when you accumulate $50 or more in your cash-back account, up to $300 a year.

2. The free ticket you'll redeem isn't exactly free
It used to be that consumers had to pay an annual fee to participate in a credit card's reward program. Not anymore. Some 80% of the card offers that have a reward attached to them no longer carry a fee, according to the Mintel Comperemedia survey. There's one big exception to this rule, however: airline cards.

Is it ever worth it to pay an annual fee? "The only time it would make sense is if it's an airline card, you spend at least $8,000 a year, and you're loyal to a particular airline," says Arnold. Airline cards typically offer better rewards than cards with travel rewards that aren't associated with a particular airline. But airline cards typically come with $60 to $140 annual fees. Now, generally you need to spend $25,000 to get 25,000 miles and qualify for a free domestic flight. So if you only charge about $5,000 a year on a card and don't fly its airline a lot, it would take you five years, or at least $375, to get a "free" ticket. (And you may not be able to redeem your points after five years at all. For more, see Point 7.)

In other words, if you're not a big spender, skip the airline cards and shoot for a no-fee option.

3. Your travel miles may be worth less than you thought
Some cards, like the Chase Flexible Rewards card, offer travel rewards that aren't associated with any particular airline and come with a lower (or in some cases nonexistent) annual fee. But there's a catch. While these programs offer a wider choice of airlines and rewards, they operate independently of the airlines' frequent-flier programs and can't be combined. You can't deposit those miles in an already-existing frequent-flier airline account, says Arnold. "You have to basically use any miles you've earned on that card separately," he says. (One exception to this rule is American Express, which allows you to redeem your points for miles that can go into a frequent-flier account.)

The good news is that those cards often have lower redemption thresholds for smaller rewards — say, a free upgrade to business class. The bad news is, in most cases those miles aren't good for pushing you into elite status with the airline — something you could get only when you rack up points in its own frequent flier program. Generally speaking, these cards make sense for people who charge enough on their cards to earn a free ticket without combining their points with frequent-flier miles from other sources.

4. You may be charged to redeem your miles
Diners Club charges its members a 95-cent fee for each 2,000 points they redeem. Participants in American Express's Membership Rewards programs are charged a fee for redeeming points for domestic U.S. flights. Say you want to transfer 25,000 points to an airline frequent-flier account: You'll be charged $10. That's 0.0004 cents per point (though the fee can't exceed $50).

The extra charge will cover at least part of the increasing costs of its Membership Rewards program, as well as taxes the company has to pay for each redeemed domestic flight ticket, says Desiree Fish, a spokeswoman for American Express.

"The cost of running these [rewards] programs is very high," says Arnold. "So tacking on fees for redemption — I think you'll see more of that."