Reevaluating my Rewards Card

I've sworn by my rewards card since the day I had it. But a friend of mine and reader of my site named Steve emailed me the other day to talk up and recommend his own strategy. On this site, I try to be a big proponent of reevaluating our spending and habits, so I knew I'd be a hypocrite of I didn't at least check out his plan and contrast it against my own. Here's what he said:

I've got a schwab account for everyday checking that has the same benefits as the e*trade. Then i automatically send rent/utilities/insurance to a wachovia account and a percentage to a ing direct account for savings.

I use a chase freedom for gas/groceries/utilities for 3% cash back, and I have an Amex that's linked with my corporate amex for everyday expenses that gets points i can turn into airline miles or hotel points.

I've got to say that Steve has a great setup. A benchmark for rewards is about 2% -- anything more than that is tough to come by. And if those rewards are CASH then it's an even better deal.

Before I go any farther, let me reiterate a point I made a couple of months ago and say that unless you pay off your balance in full every month, you shouldn't use a rewards card. They tend to have higher interest rates than non-rewards cards, so in the long run, those rewards might actually cost you a lot of money.

When you're picking out a rewards card, try and figure out what the actual value is of your reward. Cash is easy; points, not so much. If your card offers points instead of cash, figure out how much each of those points is worth in terms of cash and then make your decision. I use my Choice Privileges rewards card, which earns me free stays at Choice hotels. Here's how my points work out:

I earn two points per dollar on everyday purchases that I put on the card. So how much is that worth? I just looked at their online booking system and found a hotel room that would cost $150 per night plus tax if I paid for it, or 6000 points if I used my rewards. To earn 6000 points, I would need to spend $3,000 on everyday purchases (two points per dollar). So if $3,000 in everyday spending gets me $150 worth of hotel rooms, that means that my points are "worth" about five percent of my everyday spending. That's a bit nicer than a one, two, or even three percent cash back card.

I'd say that I travel slightly more than the average American, so I never have trouble using my points whenever I do. Yes, cash back is usually better than points because it has more utility (you're not limited in where you can spend it), but if you can earn twice as many dollars' worth of free hotels than you could dollars' worth of cash, it pays to have the points as long as you would have otherwise paid for those rooms at some point.

Steve also mentioned that he uses his American Express card so he can pool his points with his business expenditures. That's another great idea. Because points are essentially useless until you reach a threshold at which they can be redeemed, it's best to earn them in a place that has more than one "input." A second business card earning you points is a great example of this.

With my rewards card, I don't just earn points from everyday spending. I also get three bonus points per dollar spent at Choice hotels. I travel a lot for business -- sometimes for months at a time -- so these really add up with weekly (reimbursable) bills that often exceed $500. Additionally, these same hotel points can be earned by anyone that signs up, regardless of their method of payment. So Joe Schmo can sign up for an account online, make a reservation, and earn about 10 points per dollar spent, even if he pays cash. This is similar to frequent flyer miles -- anyone can sign up and earn them when they fly, but frequent flyer cardholders earn extra.

So how quickly do my points add up? Let's say that I spend $500 on a room for a weeklong business trip. I'll earn a) the 10 points per dollar that I automatically get for being part of the program, b) the two points per dollar that I earn for everyday purchases on my card, and c) the three bonus points per dollar that I get for spending money at a Choice hotel with my card. That comes out to be 15 points per dollar. Multiply that by the $500 that I spent, and I just earned 7,500 points -- more than enough for a free $150 night.

Choice also runs seasonal promotions that you see advertised on TV pretty often (does the Johnny Cash song ring a bell?). They just finished doing their "triple points" promotion, that will triple the normal 10 points per dollar. Also, because I have spent more than 40 nights at Choice hotels this year, I personally earn four extra points per dollar. So If I spent that same $500 during a promotional period with my preferred status, I would have earned 39 points per dollar, earning me 19,500 points, enough for more than three free nights at a $150/night hotel (assuming 10% tax, that's worth $495). That comes out to be virtually "buy one night, get one free!"

So my rewards card gives me 5% worth of free hotel rooms for everyday purchases. And because those points are going into an account that has multiple inputs, I can use them much faster. Other examples of these types of multiple-input accounts are Airline rewards, which deposit miles into your already existing frequent flyer account, or grocery rewards at specific chains that deposit points into an account that was opened with your little keychain grocery card.

So I'm generally a fan of getting a rewards card that gives non-cash rewards as long as two criteria are met: 1) the value of the non-cash rewards is significantly more than the amount of cash you could get back on a cashback card and 2) the non-cash rewards will be spent on something that you would have otherwise paid for in the future, like hotel rooms, plane tickets, groceries, etc (NOT random crap in an all-points Sharper-Image-like catalog).

As far as my friend's banking choice goes, I have to say that it's a wise one. The 3% interest is high and it has no minimum balance. Today my E*Trade pays me 2.8% on my checking and 3.3% on my savings, with a $5,000 minimum balance on the checking account. Technically, the Schwab account is better than my E*Trade account because it doesn't require a minimum balance. However, I like the fast transfers to my brokerage and IRA accounts that I hold with E*Trade. Though there would technically be value in switching my account, it would be too small to justify the effort of switching.

If you're choosing a rewards card of your own, look for the best offers and try and figure out where you spend most of your money. Use Mint.com to determine this, as they'll tell you how many times you've visited a particular business and how much you've spent there. That'll be a good place to start when determining which rewards card is best for you.

Thanks for your comments, Steve.