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7 ways to spot unrewarding rewards cards

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Low caps
The issuer may also limit the amount you can earn, called a cap. A low cap would be $300 or less, according to Arnold. The Citi Dividend Platinum Select card restricts cardholders to $300 in annual rebates. Arnold says to shoot for a $500 cap or a card without one.

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Examine your spending to see if a cap would impact your savings. If you would earn only 1 percent cash back and had an annual $500 cap on rebates, you'd have to spend $50,000 before hitting the limit.

Low returns on cash-back cards
"Anything above 2 percent is pretty good, anything closer to 5 percent is just fantastic," says John Ulzheimer, president of educational services for Credit.com and author of "You're Nothing But a Number." He says not to focus too keenly on the higher returns because issuers usually set caps.

Anytime you see an ad offering "up to" a high-percentage cash back, it means the card probably has tiered return rates. Until you hit a certain spending threshold, you won't get the 5 percent cash back advertised. Or you may get higher returns only on purchases in certain categories, but not on those in other categories.

Arnold considers 1 percent the baseline rate.

Tiered return rates
If you're what Arnold calls an "aggressive charger" -- someone who charges $1,000 or more a month -- you might get a good return by using a card that offers tiered rates. A tiered-rate card offers more cash back after you hit a spending threshold. For example, Blue Cash from American Express offers 5 percent cash back on everyday purchases at supermarkets, gas stations and drugstores, in addition to a 1.5 percent return on all other purchases after the cardholder spends $6,500 on the card. Arnold, who has the Blue Cash card, says it makes sense for him because his family can reach the threshold. People who spend only $500 a month on the card won't hit the threshold and will instead earn 1 percent back on everyday purchases and half a percent on other purchases.

Examine your typical monthly credit card spending to determine how quickly you would reach the highest tier, if ever. People who charge very little each month may do better with a card offering a plain 1 percent cash back on all purchases.

Merchant restrictions
Issuers of cash-back rewards credit cards like to advertise the cash-back rate you can earn for charging "everyday purchases." Unfortunately, the everyman's definition of a grocery store, drug store or gas station may differ from the card issuer's. For example, the Chase Visa Freedom Card has some significant exceptions that may surprise people, says Ridout. "Like, if you do your grocery store shopping at Wal-Mart, that's not a grocery store, according to Chase. If you do your shopping at Whole Foods, that's not a grocery store."

Chase also doesn't count KFC, Popeye's Chicken or Papa John's as fast-food purchases, which are eligible for 3 percent cash back. Telecom purchases exclude Sprint and Verizon.

Look in the terms and conditions for the definitions of qualifying purchases. Think about whether you frequent the merchants and restaurants that count toward points or rebates.

He says that consumers can try calling customer service to ask about exceptions to each rewards category, but representatives may not always know. Check your statements to make sure your purchases are getting coded as they should be.

 
 
Next: Great credit scores stand to suffer the most.
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