Credit Card Rewards: Are they worth it?

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On principle, I don't recommend buying stuff to get free stuff. It makes far more sense to just save up for those vacations and airline tickets; you wouldn't advise your kids to earn enough tickets for a bouncy ball at the arcade--it's far cheaper to just buy it at the dollar store. But having used a credit card to pay for the bulk of a vacation, I can attest that it's not all doom and gloom.

The Good
A disciplined spender can reap big rewards from good credit card rewards programs. But you have to consider more than the attractive rewards brochure before diving in. Plus you need to know your spending habits and be diligent about paying off your card each month. With interest, yearly fees, and additional spending aimed at boosting points you might make out better paying for the hotel out of your pocket. How much is the APR? Is there an annual fee? Do the rewards fit what I'm looking for? Do points expire? What are the penalties? The following list of credit cards highlight some of the more favorable rewards options.

• Airline Miles:
  Capital One No Hassle Miles Rewards has no annual fee and lower (depending on qualifications) APR than most. This card offers one mile per dollar spent each month and two miles per dollar above that amount. There's no expiration on mileage usage and no blackout dates. Discover Miles Card doubles your points for restaurant and hotel expenditures and online purchases through their website. No annual fee and flexible redemption opportunities make this card a serious contender.

• Cash Back:
  Most cash back programs offer up to 5% in "eligible purchases". I'm not a huge fan of the cash back program because of that qualifying phrase, but cards like the American Express/Costco has no limit on cash back rewards and doubles as your club card. If buying in bulk is your thing, this card can't be beat.

• Rewards:
  Predictably, the collegiate cards that offer rewards have a much higher APR than non-university counterparts. This is dangerous ground when you combine a naive spender with a rewards program. Unlike the airline miles cards, many rewards programs have a low introductory APR and then soar after the first few months. The Citi-Premier PassCard Elite Level has an annual fee of $75 but awards two points for every dollar spent and offers a wide variety of rewards.

Check out Credit.com for a more thorough list of rewards card programs and comparisons.

The Bad

To redeem accumulated points, be ready to jump through some hoops. When redeeming to purchase an airline ticket, call several months ahead to find out when you need to trade in points--some cards require many weeks to "process" your redemption. According to Jim Randel, author of The Skinny on Credit Cards, nearly 85% of American households have a rewards bearing card, but need to be especially cautious of using them as a points generating machine. If your APR and annual fee are higher than usual, or, worse, you only make minimum payments, your strategy is merely robbing Peter to pay Paul.

The Ugly
According to the Journal of American Psychology, "The more transparent the payment outflow, the greater the aversion to spending, or higher the 'pain of paying.'" In other words, people are much more willing to spend with Monopoly money, e.g. credit and gift cards. The study concludes that it's more painful to part with cash than it is to swipe a card, thus cash-only consumers usually spend less.

Some buyers would rather not even contend with credit card companies, rewards or not, for some very solid reasons. Many issue mystery interest rates and adjust according to company needs rather than relationship to the client. Let's not even begin discussing the disasters a late payment incurs. Although most payments under 30 days late aren't reported to the Wizard of Oz, er, Credit Bureau, you'll pay for it in inflated interest rates.

You stand to be most successful with taking advantage of credit card rewards when you swim against the current. Spend with a detailed budget, know how to redeem your rewards, and pay off the balance every month a week early.