Are Credit Card Rewards Worth the Hassle?

Credit cards carry some inherent dangers, but they also offer plenty of perks to the savvy user. Play your cards right, and you'll get convenience, fraud protection, free short-term loans, and rewards.

As rewards go, you can't beat cash. It's my favorite. I know plenty of people milk their credit card points for airfare, hotels, and other free stuff. Frankly, I can't be bothered. Just send me a check.

Lately, I've been wondering whether I couldn't get a little more free money by carrying additional credit cards and rearranging my spending habits a little. I already get 1% back on most purchases through a Citibank (NYSE: C) card. A few other enticing offers have crossed my path.

In particular, two cards appeared to offer better deals for my routine purchases. Costco (Nasdaq: COST) offers an American Express (NYSE: AXP) card that pays 3% back on gasoline (which certainly isn't getting any cheaper). Amazon.com (Nasdaq: AMZN) offers a rewards card that gives triple points for website purchases, which accumulate into $25 gift certificates.

The promise
Dizzy with the anticipation of my cash windfall, I decided to analyze how much I could save by taking advantage of both credit cards. After pulling a little information from my financial software, I calculated the magic number ... $57.60.

That's $57.60 in annual savings. That didn't seem like much, so I went back to the calculator. What if I charged grocery bills to take advantage of Citibank's juiced-up cash-dividends offer? Or, what if I moved some additional household purchases to Amazon? Click, click, click ...

The most profitable combination of charges amounted to a pretty measly annual reward of $69.60. Then I started to poke around Discover's (NYSE: DFS) rewards, which offer 5% back on a quarterly rotating menu of goods, to see if I should revive my moribund card. That's when I gave up.

The reality
There's just no way I'm going to keep track of a rewards system that rotates every three months. I can barely keep track of the schedule to rotate my tires.

I'm even undecided about whether to complicate my finances for a $70 reward. Yes, I do understand that I could be turning down $70 in free money. If I found $70 on the ground, I'd certainly pick it up. In a routine column, this would be my cue to tell you that $70 saved today could become $190 in 10 years if invested and growing at the market's average historical rate.

However, getting my hands on that $70 means disrupting a household spending system that keeps itself humming along quite nicely right now. Therein lies the tradeoff with credit card rewards. The user must tread very carefully and adhere to all the rules. One slip, and you've wiped out your rewards by accruing finance charges or late fees.

This exercise demonstrated the biggest catch, explained perfectly by an advertisement run by American Express: "The more you spend, the more cash back you can earn." To get cash back from a credit card, you have to spend money. Piles of research show that you will spend more money with a credit card in your hand than with cash.

So, credit card maven, know thyself. Don't fall for the promises of reward cards without analyzing the real return and the work entailed in claiming your bounty. If you can juggle your cards and rewards like a true jester, go for it. Otherwise, stick with cash.

For more Foolish credit card ideas:

• see whether rate cuts have reached your wallet;
• peer into the credit card trap; and
• find out how to get out of debt.