The mention of a reward credit card evokes images of jet-setting across the globe in a first-class seat to then lounge in a suite at a luxury resort.
But people who don't plan properly could find themselves spending hundreds of dollars a year - without one hotel stay or flight to show for it.
The problem is that many reward cards charge annual fees, and consumers need to do the math to make sure the perks they receive outweigh the cost. Every credit card has different rules for how consumers can earn and redeem miles, and what works for a consumer one year may not be such a good fit later if their spending or travel habits change.
Indeed, 1 in 5 credit cardholders are using a card that doesn't match their needs, according to a survey by the market research firm J.D. Power. For instance, 44 percent of people with airline-focused credit cards either don't spend enough on the cards to earn the miles they need, haven't booked a reward flight in the past year or have not used any of their other card perks in the past year and a half.
Because of that disconnect, some cardholders tend to feel less satisfied with their accounts and could be paying unnecessary fees, says Jim Miller, senior director of banking for J.D. Power. But instead of staying put, people who feel like their reward cards don't match their spending habits might want to shop around, he says.
Take someone with the Citi AAdvantage card, an airlines reward card that can be used to earn flights with American Airlines and charges an annual fee of $95. A person who spends only $500 a month on the card, or $6,000 a year, would have 6,000 miles at the end of the year if all of the purchases are made outside of American Airlines. (Regular purchases bring in one mile per dollar spent. Purchases made with American Airlines bring in two miles for every dollar spent.) At that rate, it would take two and a half years to have the minimum 15,000 miles required to book a round-trip flight, Miller says. In that time, the person would have paid the annual fee at least twice - adding up to about $200, or nearly enough to simply purchase a flight in cash.
For that card to be worth it, that cardholder should use the card more regularly so that he can earn miles more quickly. Or he can use the card to buy flights through the airline and take advantage of other perks, such as free checked baggage and early boarding, Miller said. Otherwise, it might be smarter to switch to a card that doesn't charge an annual fee but still offers a benefit such as cash back, he said. For instance, if that person instead used a card that pays 2 percent cash back on all purchases, he would have earned $120 a year on the $6,000 he spent on the card instead of paying $95 a year for a perk he never uses.
Another option would be to downgrade to a more basic card with the same bank that doesn't charge a fee, Miller says.
Or you can switch to a card that offers more flexibility on where points can be redeemed. Some cards let users redeem points at a range of hotel or airline companies, instead of limiting them to one company, says Zach Honig, editor in chief of ThePointsGuy.com, a website that tracks credit card reward programs.
Cardholders also should be aware of the interest rates charged on balances. Even people who are redeeming their rewards could be losing money if the card has a high interest rate and they carry a balance from one month to the next, Miller says. They might be better off moving their debt to a card with a lower rate, even if it doesn't earn them miles. (The money they would save in interest charges could help pay for their next vacation.)
And for consumers who are thinking about closing a card with an annual fee, they should call their card companies first. Some issuers may be willing to waive the fee temporarily as a way to encourage people to keep their accounts open, Honig says.
One more tip: Don't wait too long before cashing in on your reward points. Airlines and hotel companies typically rework their loyalty programs every couple of years, with the end result often being that consumers now need more points for a flight or hotel stay than they did previously. A good rule of thumb is to try to redeem those points at least once a year, Honig says. "We recommend that people earn and burn points . . . pretty quickly," he says.