Editor’s Note: This story originally appeared on The Penny Hoarder.
TV spokespersons will be quick to tell you why they sell better credit cards than others.
Double the points! No blackout dates! No annual fee!
They make it so easy to earn points and redeem for free flights and top resort stays.
But there’s no free lunch — even if you earn points on it.
That’s not to say there’s no benefit to using a rewards credit card. You can get free travel and other perks—but you have to have a strategy to make them work for you.
Before you apply for that funky new card you saw in the ad, ask yourself these five questions.
1. Do you really pay your bills every month?
If you already have credit card debt, stop reading now and focus on paying it off.
Dan Miller of travel blog Points with a Crew says financial discipline is key to the success of rewards credit cards.
“Make sure you can afford to pay your bills in full each month,” he said. “If you don’t, the interest and fees on these cards will drain any rewards you might have earned.”
If you’re steadfast in sticking to your budget and hitting your financial goals, you’re a perfect candidate for a rewards credit card. But don’t let your own confidence fool you.
If you are applying for a new credit card with a higher credit limit than expected, ignore it. Don’t take it as an invitation to spend.
We’re better at planning future income than forecasting future expenses, explains Scott Rick, a professor of marketing at the University of Michigan.
“We’re good at ignoring bad news and finding reasons to indulge,” Rick told The Penny Hoarder.
2. What does the credit card agreement actually say?
Be sure to read all details of the credit card agreement before registering. This is important for two key reasons.
First, you need to be clear about interest rates, annual fees, late fees, due dates, foreign transaction fees, and other conditions of use.
Second, you want to make sure the card benefits are worth it.
For example, using your card to earn flight rewards would be a waste of time if you can’t actually use your favorite airline points or miles.
3. Does the credit card offer cash back or reward points?
Some credit cards offer cash back rewards, while others reward you with points that can be redeemed for flights, hotels, and more.
A cash back card is usually a better option. They are more valuable than points, offer more flexibility, and your rewards are easier to use. On some cards, you can set up automatic transfers to your account (or even a credit card) when you accumulate a certain amount.
There are also several good cash-back rewards cards with no annual fee, which is another big plus.
How does the points system work?
If you choose a rewards card that accrues points upon purchase, make sure you understand:
- How many points you earn for certain purchases.
- The cash value of each point.
- What can you redeem your points for.
Each credit card company has a slightly different points system, so some purchases can help you earn rewards faster than others.
For example, the Chase Sapphire Preferred card earns 5 points per dollar spent on travel booked directly through the Chase Ultimate Rewards portal, 3 points per dollar on dining and 2 points per dollar on all other travel expenses.
Meanwhile, the Citi Premier Card provides 3 points per dollar spent at restaurants, supermarkets, air travel and gas stations, and 1 point per dollar on all other purchases.
Most credit card programs allow you to redeem points directly through an online portal.
Many programs also allow you to transfer points to partners, which can then be redeemed for flights or hotel stays, another smart way to earn more points.
4. Is there an annual fee?
Some rewards credit cards require an annual fee to receive their benefits.
Annual fees typically start around $50 and can jump to $600 or more for premium cards. However, the exact fee will vary depending on the credit card company and the level of perks and rewards offered.
American Express’ Platinum Card is one of the most expensive, with an annual fee of $695.
But annual fees aren’t all bad, says credit card writer Beverly Harzog.
“Make sure you’re getting a lot more in return than they cost,” she said.
Many cards waive the annual fee for the first year, and you can always call to see if they will waive the annual fee a second time.
Not all rewards cards have an annual fee. If you’re just starting out, keep an eye out for these deals when purchasing a new card.
Some popular no annual fee rewards credit cards include:
5. Is your normal spending enough to earn the sign-up bonus?
The real value of miles and points comes from welcome offers, which give you far more than your typical 1% or 2% bonus.
“If you’re just spending organically on the card, it’s hard to get enough points or miles to do anything,” Miller said. “Beyond those opening lines, you need to spend more money.”
Here’s a trick to the problem – without getting into debt.
Use your rewards credit card to pay for almost any purchase you make. Then log into your account every day or every other day and pay the balance in full.
This helps keep your credit card balance small and manageable. You’re also less likely to splurge on things you can’t afford. After all, you have to pay for whatever you just bought within the next few days.
If you know your credit card balance regularly and you pay it off a few times a week, you can still take advantage of those sweet bonus points without adding to debt and interest.
Before you sign up for a rewards credit card, check your budget and see how much you typically spend in a month.
If you typically spend around $1,000 a month to cover everything, you can easily get a sign-up bonus that requires you to spend $1,000 in your first three months.
However, if the sign-up bonus requires you to spend $5,000 in the first three months, you should probably use another card that offers a more rewarding bonus.
Certain bills, such as utilities and rent, are often charged if you pay with a credit card instead of a checking account. Use your debit card to pay for these fees and your rewards credit card for other fees.
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