www.calamos.com
AUGUST 2022
Evaluating Credit Card Reward Programs
Retirement Solutions
Consumers are using credit cards more than ever. The good
news is that smart consumers can turn their spending into
rewards. Credit card companies offer cash back, hotel points
and airline miles for everyday spending, but there are various
formulas used to calculate the reward to the consumer. How can
you determine the best credit card reward program for you?
The rst point to consider is that reward credit cards are not
for everyone. Credit cards that offer rewards tend to charge
higher interest rates, for example. If you carry a balance, a
reward credit card is not a good choice as you lose lower
interest rate nancing. The benets of a lower interest rate
to someone carrying a balance is much bigger than receiving
rewards from the same credit card.
Keep your circumstances in mind as you consider the variety of
credit cards available:
• Balance transfer cards – for those that want to pay off
their credit card balance without high interest rates. These
cards usually charge a fee to transfer your balance but offer
0% nancing for a dened time period.
• Introductory 0% APR – if you do not want to pay off
your balance immediately. This card offers 0% interest on
purchases and your transfer balances for a dened period,
generally 12-18 months.
• Secured – designed for individuals with poor or limited credit.
A “secured” credit card is backed by a cash deposit, usually
equal to the credit limit. They sound like a pre-paid card but
you still have to make payments and card activity is reported
to the credit bureaus. Secured credit cards are a good way to
help those with poor credit improve their credit score.
• Rewards – Reward cards are best if you pay off your
balance each month. Incentive cards offer cash, points or
miles remuneration based on your spending. Often, these
cards will offer a sign-up bonus: receive a bonus once you
reach a required spending amount within a specic
amount of time.
Credit Card Fees
In general, it’s best to avoid credit card fees. However, since
some reward cards charge an annual fee, it could make
sense to pay the fee to receive rewards. It is important to
understand the fees associated with your credit card so you
can determine if the rewards outweigh the fees charged.
• Annual fee – assessed once a year, a card with an annual
fee usually offers better reward structures. Sometimes
credit card companies that charge an annual fee offer a
larger sign-up bonus compared to cards that do not charge
an annual fee.
• Foreign transaction fee – a percentage-based fee, typically
3-4%, on charges made internationally.
Consider a foreign transaction fee card if you plan to travel
overseas. Some annual fees cover the expense of foreign
transaction fees. This is an instance where paying an annual
fee eliminates fees associated with international charges.
• Late payment fee – You can avoid a late payment fee by
making your payments on time. Currently, the average late
fee is $35. It is a good idea to set up automatic payments if
you are concerned about forgetting payments.
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• Cash advance fee – several credit cards allow you to
take cash advances from your card from an ATM or at
a bank branch. The credit card company charges a fee
to advance the cash and a higher APR than normal.
Typically, they do not offer a grace period, so interest will
start to accrue immediately. Only use the cash advance
feature as a last resort. Keep emergency funds on hand
for instances that you need cash.
When Is an Annual Fee Worth It?
Credit cards are available with or without an annual fee,
so it is a good idea to compare offers. To illustrate, here is
a comparison of hypothetical credit card offers from the
same company. One of the credit cards charges an annual
fee. At what point does the higher annual fee of Card X
overtake the higher sign-up bonus?
Card X: $95 annual fee, 2 points for every dollar spent
Card Y: No annual fee, 1 point for every dollar spent
Card X = 0.02x – 95
Card Y = 0.01x
0.01x = 0.02x – 95
X = $9,500
It is worth the annual fee of $95 if you spend more than
$9,500 a year on that credit card. If you do not, it is more
benecial to select the card with no annual fee.
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Credit Card Reward Programs
Credit card rewards can be redeemed for cash, travel,
gift cards, tickets to events such as concerts and sporting
events, merchandise, charitable contributions—and
the list goes on. They are a great way to pay for trips
by accumulating points or to offset typical spending by
collecting cash back.
However, it’s always good to remember: If you carry a
balance, credit cards with rewards charge higher interest
rates than those that do not.
Reward credit cards may offer different reward rates based
on purchased items. Determining where you spend the bulk
of your money will help you select the best reward program
for your goals. Consider nding a card that offers more
reward points for your most prevalent spending categories,
such as groceries or travel.
Strategies to Maximize Your Reward Programs
The goal in carrying a cash back credit card is to maximize
the cash back for dollars spent. It is easy to calculate the
return on a xed percentage cash back credit card. If the
cash back percentage changes depending on the category
or merchants, the calculation can get more challenging.
Some credit cards even put limits on the amount spent that
is eligible for additional cash back incentives.
One option to maximize cash back is to carry multiple cards
based on what card gives you the most cash back based
on merchant/category. However, it can be overwhelming
to remember which card provides the maximum benet
depending on the purchase.
There are also multiple options to redeem your “cash back”
rewards. Different credit cards may offer different options,
such as a statement credit, direct deposit to your banking
account or a gift certicate for various businesses.
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Nerd Wallet, How to Evaluate Credit Card Offers, Erin El Issa
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Travel Reward Cards
It can be challenging to calculate the rewards when it
comes to cards that offer points or miles related to travel.
For example, a credit card company provides two miles
earned per dollar spent. Miles can be redeemed for one
cent each as a statement credit against any travel expense.
Therefore, cardholders receive the equivalent of 2% back in
rewards value for each dollar spent.
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Airlines and hotel brands offer co-branded reward credit
cards. This is a popular option if you like to travel, but
calculating the benet also presents a challenge.
Case in point, holders of an airline credit card who receive
the standard one mile per dollar spent will not benet
much if they have to use 25,000 – 50,000 miles for a
“standard” domestic airline ticket. If the cost of the airfare
is $500, the cardholder is only going to receive 1-2% back
on their purchases. However, if they can use 100,000 miles
for a “business class” ticket for international travel, the
award will probably be worth several thousand dollars. The
individual has realized four to eight cents per dollar spent
using the credit card. If the same individual selected the
cash back option on a card that returned 2% on airline
travel, they would receive $2,000.
Using miles for rst or business class air travel
internationally provides the biggest reward, as these airline
tickets cost far more than an economy class ticket. The
upgrade costs relatively few miles compared to the benet.
Additional benets to consider: Most credit cards offer a
host of benets, including shopping and travel protection.
Shopping benets may include purchase and price
protection. These programs reimburse you if covered
items are damaged or stolen or go down in price within
a specied amount of time. Travel benets may include
trip cancellation and interruption protection, car rental
insurance and lost baggage protection. Review the benets
to be sure the protection benets offered match the list of
benets that are important to you.
Summary
Reward credit cards are not for everyone, so it pays to
follow a smart strategy.
Utilizing your credit card for everyday expenses will deliver
points, but it’s best to pay for only what you can afford
and pay the credit card balance off, in full, each month.
Since reward credit cards charge higher interest rates on
card balances, strive to pay off your credit card debt and
limit spending to what you are able to pay off monthly.
Choose a card that offers the highest rebate. If you are
doing home improvement, look for a card that rewards
spending at home improvement and hardware type stores.
Some of the cards offer allow you to use points in various
capacity such as cash back or airline tickets. If you’re
uncertain as to what is the best reward for you, this option
may be your best bet.
In any case, choose your reward credit cards wisely. Seek
to limit fees, match rewards to your spending patterns and
keep your balances in line with your budget.
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https://www.moneycrashers.com/compare-best-credit-card-rewards-programs/
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