Points, Cash Back and Other "Rewards" from Your Bank: How to Cash In on the Right Deal
For decades, banks have given gifts for simply opening a new account. (Remember the free toasters?) But in recent years, banks have turned to special "rewards" programs that not only show appreciation for opening new accounts, but also encourage people to remain as customers and use a variety of services.
Examples range from credit cards that enable users to gradually accumulate cash rebates or "points" good for free travel or merchandise, to checking accounts that offer cash or other prizes for frequently using a debit card.
"Rewards programs can be great deals for consumers, but the key is to shop around, make smart use of the rewards and avoid pitfalls," said Lekeshia Frasure, an FDIC Community Affairs Specialist. Among the potential downsides, she said, are allowing the rewards to overshadow more important features of an account when you're comparison shopping, and letting your guard down against unnecessary spending because you're earning rewards by using your credit or debit card.
Here are our latest tips on rewards programs and how to maximize the benefits and minimize the problems.
Choose an account primarily because it meets your needs, not just because of the rewards. If you end up choosing between two accounts with similar terms and features that both meet your needs, it's fine for the rewards to be the deciding factor. "But don't let rewards alone tempt you into signing up for an account," warned Mira Marshall, an FDIC Section Chief specializing in consumer issues. "If you spend more than you would at another institution, those 'free' rewards may cost more than you think."
Similarly, Luke W. Reynolds, Chief of the FDIC's Community Outreach Section, said, "You shouldn't let rewards tie you to a card or account that is no longer meeting your needs, particularly if you can get a better deal elsewhere." And what if you do decide to close an account? "Be sure to first redeem or cash in your rewards," he said.
Look for rewards that match your banking and spending habits. Let's say you usually carry a balance on your credit card. That means you'll be paying interest charges, so your first priority is to find a card with a low Annual Percentage Rate or APR – and that most likely will be a card that does not offer generous rewards.
"Rewards cards tend to carry higher interest rates, so if you carry a balance each month, the interest costs will almost certainly exceed your rewards," said Frasure. On the other hand, if you expect to pay off your balance in full each month, the interest rate is less important than a card's other costs or features, including the rewards.
Also look for a credit card that will earn you rewards at stores and services you use most often. Some cards may offer additional rebates for certain categories of transactions, such as gas or groceries. But don't let a special rebate preclude you from shopping around for the best price.
And if you're not sure which rewards program is best for you, consider hedging your bets by opting for a product that gives cash back instead of points for travel or merchandise. According to the July 2008 issue of Consumer Reports magazine, "You might never redeem your points, so at least you will get something" when you get cash back. The magazine also said that its research shows that "cash-back cards tend to be more generous in their rewards."
Weigh the costs against the benefits. Some rewards credit cards charge an annual fee, while others don't. "You'll have to figure out whether you would earn enough rewards to justify the annual fee," said Reynolds.
Watch for transaction fees, too. For example, with checking accounts that reward the frequent use of a debit card, make sure the bank doesn't charge a fee for transactions. Most importantly, you also need to keep track of your transactions and watch your account balance to prevent costly overdrafts.
Also remember that, to earn cash or points, there is an incentive to spend as much as you can to get the most benefits. "Consumers need to be concerned about interest charges and unnecessary spending that results in unmanageable debt, which can more than cancel out any rewards you would earn," said Reynolds.
Understand what you can lose if you don't meet the terms and conditions of the account. Read your new account information and periodic mailings from your bank to look for information about restrictions, fees and penalties.
Some banks may offer special checking accounts that pay a very high interest rate, but only if certain requirements are met. For example, the high interest rate may apply only up to or over a certain balance. Or, you may need to pay most of your bills online or use your debit card at least 10 times a month. "These accounts can be worth investigating, but if you don't meet the requirements, you can expect to suffer the consequences, such as a dramatic drop in the interest rate," said Frasure.
Also, be aware if your points are subject to an expiration date. "As always," Reynolds said, "be sure to promptly read all the correspondence you receive regarding your rewards, because it may be announcing changes or limitations in the program."