There are literally hundreds, if not thousands, of credit cards to choose from that offer rewards. So, how do you determine which rewards card is the best value?
Cash-back cards are easy to understand. If your card gives you 1.5% cash back, and you spend $10,000 during the year, your rewards from that card are worth $150.
However, once you get into the realm of rewards cards that offer you points, figuring out what you really get back for your spending is a lot less straightforward. For instance, how much are those airline miles really worth? And for hotels, 30,000 points from one loyalty program may have a completely different meaning than the same number from a competitor's program.
So, how do you figure out which rewards card you're better off using?
Making those airline miles go farther
The consensus seems to put the value of airline miles at about one cent per mile. In fact, some credit card programs, like the Delta SkyMiles American Express credit cards, allow cardholders to redeem miles for any flight at exactly that value.
However, there are a number of situations where you can squeeze more value from your miles, and a great example is international travel. A quick search shows that I can redeem 125,000 of my Delta miles for a round-trip business class ticket to Rome, while the same ticket would cost almost $4,000 to purchase. In this case, I'm getting $0.032 in value for each mile I redeem.
All of a sudden, the one mile per dollar spent on my credit card looks much better than 1.5% cash back. And, most airline cards give you double miles on purchases with that airline. So, using the previous example, I'm actually getting 6.4% in rewards back for any Delta purchases, plus whatever miles I earn for taking the flights themselves. If you travel a lot, the rewards can really be quite lucrative.
Of course, this is just one example. There are plenty of situations where you can get even better value.
Hotel point and low- vs. high-brow tastes
Hotel points can vary tremendously in value between reward programs, and within those programs themselves.
For example, Starwood Preferred Guest (SPG) point values can vary tremendously based on what hotel you redeem them at. For example, a "category two" hotel (SPG categories range from one to seven), such as the Sheraton Suites Fort Lauderdale Cypress Creek will cost you 3,000 points for a free weekend night. At the standard advertised rate of $129 per night, you get 4.3 cents per point in value, not including any taxes and fees charged.
However, if you have more "fancy" tastes, the value can diminish significantly. For a "category six" hotel like the Westin Times Square in New York City, a night will take 20,000 of your points. At a room rate of $359 according to Starwood's website, each of your points only gets you 1.8 cents in "value."
By the way, Starwood's points (and those of several other brands) are convertible on a one-for-one basis to airline miles on most major airlines, and you can even get a conversion bonus if you transfer enough. So, you can get value out of your points that way, if you so choose. And, you'll usually get double (or more) points when you charge hotel stays at your chosen brand, further adding value to your rewards.
Also, beware of some of the inflated point numbers some hotel loyalty programs are using. For example, the Club Carlson Premier Rewards Visa Signature Card will give you up to 85,000 bonus points for opening a new credit card. However, the points required for a free night range from 9,000 to 70,000, depending on the category of hotel. So, this is actually a very similar offer to the SPG American Express' 25,000 point bonus, even though it might sound much better at first. Both offers will actually get you about the same amount of free hotel stays.
The most important question to ask yourself is this: Are the perks you're earning valuable to you?
Getting great deals on international flights is meaningless if you have no interest in taking one. And staying in a hotel with points doesn't have much value to you if you don't like to be away from home. If this is the case, good old-fashioned cash back rewards may indeed be the most valuable to you.
However, if you like to travel and are willing to do a little homework to maximize the value of your rewards, you could find that your rewards card actually has some pretty valuable points after all.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool recommends American Express and Visa. The Motley Fool owns shares of Visa. Try any of our Motley Fool newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.