Is a 'rewards card' right for you?

What's your rewards pleasure? Cash back? Discounted airfare? Free earphones? Whatever your fancy, there's a credit card out there designed for you. But before jumping on the rewards bandwagon, ask yourself: Will getting the reward cost me more than it's worth? Which rewards make the most sense for me?

The rewards that banks dangle in front of consumers are tempting. Today, some 85 percent of US households count at least one rewards card among the seven (on average) credit cards they own. In 2006, financial institutions spent $10.3 billion on rewards, a figure that is expected to grow to $18.4 billion by 2010, according to Aite Group, a Boston-based research firm.

But rewards cards can fast become unrewarding if consumers use them as an excuse to buy more. "Rewards cards lull people into spending more than they should," says Ben Woolsey, director of marketing at creditcards.com. "People think, 'It's OK if I buy the TV because I'm getting 2 percent cash back,' but that's not really sound money management." Other things to consider:

1. Do the math. Along with the temptation to buy more comes the risk of carrying a monthly balance and losing rewards to interest or – worse – late fees. "Rewards cards shouldn't be used by people who can't pay them back [in full] every month," says Mr. Woolsey. An unpaid $100 charge at a 14 percent APR costs $1.16 in interest in a month. That's 16 cents more than The $1 earned in a 1 percent cash-back deal.

So If you carry a balance, even for short periods of time, rewards perks are secondary to rates and fees.

2. Be realistic. Think twice about getting a rewards card if you're enticed by MasterCard's American Dream card (where you accumulate points to enter a monthly sweepstakes), or Visa's World Series of Poker card (which offers reward points toward such things as buy-ins to World Series of Poker events).

3. Beware hidden costs. The United Mileage Plus card offers double rewards miles for federal, state, or local tax payments, and the JetBlue card from American Express offers double award dollars for payments of federal taxes. But the third-party processors that take payments on the government's behalf charge a "convenience fee" – typically 2.49 percent – that can be more than the reward itself.

4. Shop around. If you decide rewards are right for you, you have thousands of cards from which to choose.

If you want to research them, credit-card issuers like Chase and Bank of America offer information about their credit cards online, and cardratings.com offers recommendations and consumer reviews. "We pride ourselves on having a card to suit almost any consumer's needs," says Tanya Madison, a Chase spokeswoman.

She's not kidding: Chase's cards range from the mundane (the Academy of General Dentistry Platinum Visa) to the bizarre (Eskimo Joe's Platinum Visa, the KISS Visa).

So should a confused consumer simply settle for the Chase PerfectCard (yes, it exists) and call it a day?

Well, no. The goal is to get the most value out of your rewards as possible, says Curtis Arnold, founder of cardratings.com.

Mr. Arnold follows his own advice: He says he got close to 1.8 percent cash back last year – more than $750 – using the Blue Cash card from American Express, a tiered card that gives a higher percentage of cash back the more you charge.

5. Consider going the debit rewards route. You get fewer benefits with debit rewards, but you avoid the risk of running up debt. Credit-card programs typically give you one point or one mile for every dollar you spend, but the typical debit rewards program is one point or mile for every $2, says Chris Allen, senior manager at Dove Consulting. Some offer just one point for every $3.

Bank of America's "Keep the Change" is a hybrid program that combines a savings program with rewards. Debit-card purchases are rounded up to the nearest dollar, and the difference is put in the customer's savings account. For three months, Bank of America matches these savings. After that, the bank deposits 5 cents for every dollar saved this way, up to $250 a year. It's not a rich rewards program, but at least it encourages a low level of savings. [Editor's note: The original version incorrectly named Bank of America's hybrid reward program.]

6. Take the "merchandise or cash back" test. If you're considering merchandise rewards cards, get the card's catalog, find a cash-back card with similar terms, and see if you can get a better deal with cash back, says Arnold. There's a good chance you can.

"Any reward program tied to a catalog, where they're trying to give you free merchandise, historically – across the industry – has been a raw deal" for consumers, he warns.

And with cash back, you don't run the risk of creditors increasing the cost of merchandise, or whipping yourself into a buying frenzy as you flip through the rewards catalog. If you still can't decide, check out Chase's Freedom card, which lets you switch from points to cash and back without penalties.

7. Make sure you can cash in on rewards. Card issuers pay more to dole out airline miles than they do for all other types of rewards combined. But if you're not going to charge enough to get a ticket, or ticket restrictions make it hard to redeem your rewards, then you're better off with another card.

8. Look at "savings" cards. Some rewards cards help you put away savings or pay off debt. With the Citi Home Rebate Platinum Select MasterCard, holders can use points to pay down their mortgage. The Citi Upromise Credit Card uses points to save for college or for paying down certain student loans. But unless you charge your house on your Upromise card, there's little hope you'll put much of a dent in college education costs.

9. Consider charity. If you're feeling generous, donate your rewards to your favorite nonprofit. The Ducks Unlimited Visa Card, one of the first cards linked with a charity, has generated close to $65 million in donations in 20 years, says Philip Milburn, director of corporate relations at the wetlands' protection organization.

Ducks Unlimited receives donations every time someone signs up or renews the credit card, and for new purchases or balances held on the account. Check your card, though: Many credit-card companies allow you simply to donate rewards points to charity.

Arnold suggests that cardholders wanting to donate to charity should do some comparing: If you'd get more money with a cash-back card than the charity would receive from an affiliation card, then get the cash-back card and use the money you receive to write a check to the charity at the end of the year.