Check your credit and consider your spending patterns before applying.
For consumers with good credit, a rewards credit card could allow them to earn cash back, airline miles or points redeemable for gift cards, merchandise and more. As of 2012 (the latest year for which data is available), the average American had four credit cards, according to the Federal Reserve Bank of Boston. Of those cards, just over half were rewards credit cards.
Credit card rewards programs change over time, so don't assume that the card in your wallet offers you the best available rewards, even if that was the case several years ago. "At least every few years take a look at what you're getting form your card and if there's a better deal out there," says Liz Weston, a personal finance columnist and author of "Your Credit Score."
Here's a look at steps to take before applying for a rewards credit card.
1. Check your credit report. Before applying for credit, check your credit report and make sure everything is in order. If someone else's collections activity has gotten intermingled with your file or if you've forgotten about a delinquent account, then you might not qualify for a rewards credit card right now. Report any errors to the three credit bureaus to clean up your credit. Also consider whether your credit can handle the impact of another credit inquiry. "Anytime you open or close an account you're dinging your credit," Weston says. "Each time you go after these deals, make sure it's worth it." If you already have several credit lines and you're planning to apply for a mortgage or car loan in the near future, then it might be best to temporarily hold off on applying for other types of credit until the car or house is secured.
2. Be honest about whether you pay on time and in full. Rewards credit cards typically carry a higher interest rate than traditional credit cards, so they're not a good idea for people who carry a balance. The amount you'll pay in interest and other fees can quickly outpace the value of any rewards you're earning – and in some cases, you may lose your rewards. "With rewards programs, there's usually a clause that if you miss payments or go over your limit, you can lose rewards," says Beverly Harzog, a credit expert and author of "The Debt Escape Plan. " "Some of them let you get your rewards back for a fee, many do not."
3. Look at your spending volume and charge patterns. Review the amount you're currently spending and in what categories, because some credit cards offer higher rewards in categories such as restaurants, gas, groceries or travel. Sometimes these reward categories are fixed, and other times they rotate quarterly. "There are some cards that allow you to choose the bonus categories and others where the card issuer decides on the bonus categories each quarter," says Zach Honig, editor-in-chief of ThePointsGuy.com, a
website that provides information on travel and credit card rewards. "You need to stay on which categories earn additional points each quarter."
Also look at your charge volume. If you're not charging enough to earn a free flight from an airline card, then you might consider other options. "If you are a very light charger, if you only have a couple hundred dollars a month, maybe the cash-back [card] is going to be the best fit for you," Weston says.
4. Consider what types of rewards fit your needs. Just because your co-worker or neighbor swears by a certain credit card doesn't mean it's the right card for you – even if it offers hefty mileage or bonus points. "Don't get swayed by a generous signup bonus," Harzog says. "Decide what type of rewards would be best for you." If you're a frequent traveler who's loyal to a specific airline or hotel brand, then a branded card might be the way to go. Some airlines cards offer frequent flier miles in addition to free checked bags and early boarding, Honig says. However, if you rarely travel, then a cash-back card might make more sense for your needs. Cash-back rewards also means you don't have to search for available flights or hotel stays. although some rewards chasers enjoy the challenge of redeeming rewards at the highest possible value.
5. Investigate fees, caps and caveats. Many rewards credit cards have a basic version with no annual fee and a more generous version that does charge an annual fee (although this is sometimes waived for the first year). Unless you use perks like free checked bags regularly or have high charge volumes, you may not get enough value from the card to justify the annual fee, so Honig suggests starting with the no-annual fee version to see if it's right for you. "If you don't use it, then you don't have to worry about any surprise charges," he says. If you're charged an annual fee on a card that's dormant, it's possible that you'll forget to pay the fee and get hit with interest charges.
Also find out if the card you're interested in charges a foreign transaction fee (especially if you travel abroad or do business online with international companies), caps the amount of rewards you can earn or attaches an expiration date to rewards. Some also require you to register for bonus categories before you start earning bonus points or miles. "The card issuers sometimes don't make it easy to earn bonus points and cash back, but it can be done," Honig says.
Once you've activated your rewards credit card, Harzog has one last bit of advice: Use your rewards before they expire or get devalued. "Many rewards cards don't have expiration dates [on the rewards earned], but it's always possible that a credit card issuer will change their rewards programs," Harzog says. "It's nice to save for a big trip, but don't hang onto these rewards forever."