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O’Connor: Credit card rewards all about balance

Brian J. O'Connor
Detroit News Finance Editor

When it comes to credit cards, Michiganians are playing their plastic the right way.

That’s because, according to the personal finance site, the most popular type of card used by residents of the state is one that gives cash back on purchases, as opposed to cards that charge low interest rates on balance transfers or award hotel or airline points.

It’s not that one type of card always will be head-and-shoulders above the rest, but how you use the card that defines what particular piece of plastic is best for your bottom line, says Sean McQuay, NerdWallet’s credit card expert.

“I assumed cash-back cards were somehow weaker, because the awards were so easy to redeem,” McQuay says. “Why would they give you cash when they can give you points? But that thinking is wrong.”

Max your minimizing, or vice versa

It turns out that the type of rewards that pay you back best depends on whether you carry a balance or pay the card off each month, and how big that balance is. Michiganians carry the 11th-lowest average card balances in the nation — $4,816 according to July 2016 data provided by the Experian credit reporting service. With no or low balances, cash back works out to be the best deal.

But in Alaska, where the average balance of $7,444 is the highest in the nation, balance-transfer cards are the most popular.

“The question to ask is whether I’m looking to minimize my costs or to maximize my rewards, and whether I’m going to pay off my card each month,” McQuay says. “With a zero balance, everything else is about maximizing rewards.”

For folks who do carry a balance, though, transferring that debt to a lower-rate balance transfer card works best, even though there will be a transfer fee charged. One hurdle is that balance-transfer offers are limited to consumers with very good credit scores.

Still, if you qualify and are paying down debt, skip the rewards and cut the cost of clearing your balance.

“The rewards will never outweigh any interest on credit-card debt,” McQuay says.

Redeeming qualities, despite fees

One of the reasons NerdWallet finds cash rewards coming out on top is simple: the cards are cheaper. Very few cash-back cards charge an annual fee, McQuay says. The few cards that do, such as the Blue Cash Preferred Card from American Express, pays a 6 percent reward on groceries, which can quickly offset the $95 annual fee. As soon as you spend $1,600 on groceries, you’ll be in the black.

“If you’re disciplined enough to use your cash back for meaningful purchases, it’s a good deal,” McQuay says.

For travel rewards, hotel- or airline-branded cards tend to give better values, even though some come with high annual fees and the formula for redeeming points is subject to the whims and profit desires of the issuers. Airlines, for example, have restricted the seats available for miles rewards and upped the amount need to score a free ticket.

Those cards make up for their downsides with big sign-up bonuses, such as the 30,000 points on the Gold Delta SkyMiles card from American Express. And additional benefits also go to branded card-holders, such as priority boarding and free check bags.

“They make it up to you with more perks,” McQuay says. “If you travel frequently with the same brand those cards are excellent choices, even though the points are inflexible and they may have poor rewards rates.”

Go further on cash-back

General travel rewards cards that allow you to book reward trips on a number of airlines or hotels are less of a deal, although some come with good sign-up bonuses. But on the whole, if you’re not paying down a big balance, cash-back is the way to go, and is the most popular card in 27 states.

“I’m glad that cash-back is the big winner because, for most Americans, it really is the best choice,” McQuay says. “The average American needs to spend $8,000 a year to justify the fee and cost of a travel rewards card over three years to be better off than they would be with a no-annual-fee, cash-back card.”

There’s just one hitch if you’re going to go the cash-back route: Use that dough for something that gives you at least as big a thrill as the free vacation flight you’d get from a travel-rewards card. A new set of snow tires might be financially responsible, but it’ll never beat jetting to the beach.

(313) 222-2145

Twitter: @BrianOCTweet

Brian O’Connor is author of “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”