How to pick the best rewards credit card for you

West Monroe Payments Practice works with our clients to help them develop payments strategies, products, and partnerships.  As both professionals and consumers, they are frequently asked about credit card rewards, features, usage best practices, technologies, and more.  Over a series of blog posts, we examine several of these topics in more depth.

The rewards credit card market is hotter than ever as banks battle to acquire new customers and hang on to existing ones.  Are you missing out on the rewards war?  Points vs. miles vs. cash back – it’s pretty confusing and can seem overwhelming.  At a high level, let’s look at some important factors you’ll want to examine when considering a rewards card.

1. The On-Going Rewards Categories

What would you like to earn rewards on?  This one is simple and often clearly advertised within the card offer.  To gain a basic understanding of what is being offered, the assumption can be made that 1 point, 1 mile, or 1% in rewards is roughly equal to a penny.  In other words, a travel card offering 2X points/miles on all purchases is offering roughly the same value as a 2% cash back card (assuming you have no rewards preference – more on that later!).  Now that we got that out of the way, at the most basic level, you’ll want to consider a card that gets you at least 2% of value on your highest spend category.  Is a large percentage of your yearly spending on groceries?  You may want to examine cards that offer accelerated rewards at grocery stores.

2. Sign-Up Bonus

Would you like to be gifted a large lump sum reward soon after signing up for a new credit card?  Of course you would!  As banks battle for new cardholders, sign-on bonuses keep getting richer and are often the numbers that make the headlines.  In today’s environment, you should be able to find $100-$200 worth of value for non-annual fee cards, and $400 or more worth of value for annual fee cards.  Some banks have recently sent shockwaves through the industry by offering $1000+ worth of value on their top tier annual fee cards!  Keep in mind, many of these lucrative sign-on bonuses are only gifted once the cardholder hits a specific amount of spend within a given time period, so it might be worthwhile to time your card sign-up with big purchases (vacation, flights, etc.) to ensure you receive the bonus.

3. Rewards Portals

Several banks offer online shopping portals that provide discounts or accelerated rewards for online shopping.  If you do a lot of online shopping (like me!), these portals can provide significant earnings as they provide anywhere from 2-20% rewards or discounts at merchants.  If you prefer the brick-and-mortar experience, some banks offer in-store discount coupons as well (be sure to read the fine print on how to successfully use these coupons).  Frankly, it’s very difficult to gain insight into which bank shopping portals are the best for you without already having one of their cards and, to make things even more complex, the offers and merchants found within the portals change from time to time.  The best advice I can give you is that if your card comes with an online shopping portal, be sure to check it before you make a purchase elsewhere, as you could be missing out on valuable rewards and discounts.  Cashbackmonitor.com is also a helpful site for comparing earnings rates at different shopping portals.

4. Redemption Options

What would you like to redeem your rewards for?  Credit card redemption options vary widely by bank and card.  Most banks clearly advertise redemption options upfront.  Typical redemption options include cash back, statement credits, travel, gift cards, and merchandise.  Certain cards from Chase, Citi, and American Express also enable cardholders to transfer points to partners’ loyalty programs – if this route is of interest to you, it’s important to research which cards allow this and who the travel partners are.  Sophisticated rewards cardholders will often use a bank’s proprietary card or a merchant’s co-brand card to supplement the rewards they are already receiving from their favorite airline or hotel for being a loyal customer.  However, be careful when considering a transfer to a travel partner, the rewards conversion rates can be less than desirable.

5. Redemption Value

A credit card can have a rich looking rewards scheme and a wide array of redemption options, but if the bank devalues your rewards when you redeem, what good is that rich looking rewards structure?  You should strive to achieve at least 1:1 redemption (meaning, 1 point or 1% rewards is equivalent to a penny).  Often you can find better redemption value than 1:1, but you certainly do not want to be getting less than that.  This category is difficult to evaluate without being a cardholder; however, once a cardholder, you’ll want to redeem your rewards in a manner that gets you the most bang for your buck.

6. Bank Relationship Benefits

Are you already a customer of a bank?  When surveying rewards cards, it’s important to research whether your bank offers additional cardholder benefits for being a bank customer.  For example, Bank of America offers increased rewards redemption perks based on the amount of money you keep at the bank, and PenFed Credit Union boosts the earnings on its 1.5% cash back card to 2% if you have a PenFed checking account or are a current/former military member.

7. Annual Fee vs. No Annual Fee

Should you get a credit card with an annual fee?  This is a tough one.  If you’re not a big spender, it’s probably hard to justify an annual fee – this is because the increased rewards value may not outweigh the cost of the annual fee.  However, what the annual fee gets you is very important.  For example, if you’re not someone who flies frequently enough to obtain status with an airline and you check bags often, it may be worth it to pay the annual fee for an airline credit card that offers free checked bags.  A card’s offering on the redemption side of the equation could also justify its annual fee.  Let’s look at the Chase Sapphire Reserve card, for example.  This card enables cardholders to earn a 50% bonus when points are redeemed for travel through the Chase Ultimate Rewards travel portal.  Thus, if you were lucky enough to earn 100K points when you signed up for the card (I say “lucky” because the 100K point offer is no longer available) and you chose to redeem those rewards for airline travel (roughly equivalent to $1000), you would obtain roughly $1500 worth of value, which means you just earned an extra $500 during the redemption process.  That single redemption “pays” the annual fee for years to come (the true annual fee on that card is $450, but you receive $300 annually in travel statement credits).

8. Card Network Benefits

Have you ever broken an item or witnessed it go on sale soon after purchase?  Many credit cards automatically provide purchase protection, extended warranties, protection against changes in price, and other valuable benefits that many cardholders are not aware of.  Crack your new iPhone’s screen in the first 90 days of ownership?  You may be eligible for a free screen replacement courtesy of your credit card.  Drop a paycheck on a shiny new television only to watch in horror as it went on sale the following week for hundreds of dollars less?  You may be eligible to receive the difference between the price you paid and the sale price.  Like most “insurance” products, these card benefits are rarely used by most people, not to mention they require some legwork on behalf of the cardholder.  However, if you do need to use them, they can result in enormous savings.  It should be noted that the item must be purchased in full via your credit card to receive these benefits.

As you can see, picking your ideal card is no easy task!  There are a lot of options out there.  If you really want to optimize your earnings, it may even make sense to divvy your spending up between multiple cards.  I hope, armed with this information, you can make a more educated assessment of your choices as you survey the vast landscape of rewards credit cards.  Remember, spend responsibly, otherwise your search for the best rewards will be eroded by fees.

About West Monroe’s Payments Practice: West Monroe’s team of industry and technology experts helps our clients navigate the payments landscape by providing key insights to plan, build, assess, and improve payments initiatives. We use our uncommon blend to guide each step, from strategy formation to ongoing program management, to ensure your payments products, partners and technologies are helping you achieve your goals and meet consumer demands.