Rewards are great.   I have several really exiting vacations planned next year that are financed in whole or in part by points and miles from reward cards.   There is absolutely no way that my family and I could afford these luxuries without my proficiency with earning rewards on my credit cards.

As any wise reward credit card holder knows, credit cards are a financial instrument that is kept only so long as they are useful; they are not a lifetime commitment.    That begs the question, where do my Miles, Points, or Cash back rewards go when I cancel my credit card?

The Three Different Types Of Reward Systems

I can break every reward card down into three different types.

The first is cash back cards. They seems simple compared to other complicated miles and points programs, but there are several different ways that a cash back card can determine the disposition of your rewards.     Many cash back cards give you a check or a statement credit every month.    Others dole out your rewards when a threshold is met.   There are some that give out rewards annually, based on either the calendar year, or your sign up anniversary. Finally, some popular cards have a sort of hybrid scheme.  My Capitol One card is one of those hybrid cash back cards.   I get 1% cash back monthly, but I only see the statement credit when I reach $25 in cash back.     It is my assumption that should I cancel the card, I would get the remaining fraction returned on my last statement.   In addition, I also get another .25 percent back at the end of the year.   The Costco Amex, on the other hand,  is infamous for giving out cash back on an annual basis, every February.   The problem is that if you cancel your card before February, or even if they cancel you, you loose out on an entire year’s reward, which could be hundreds of dollars.

The second type of reward card gives out bank created points. These loyalty programs, like American Express’s Membership Rewards are created and run by the company issuing the credit card.    Each is different, but the general idea is that the bank itself can grant, withhold, or even subtract rewards from your balance, in accordance with it’s program’s terms and conditions.    Those terms and conditions are subject to change at a moment’s notice as well.    My understanding is that if you cancel all of your Membership Rewards credit cards, you loose all of your points.   In other situations, these bank run reward systems withhold points if you are late with your payment, or they may freeze your account altogether.    You will have to do the research yourself to become familiar with your bank’s rules and regulations.

The third type of system is one I think of as a third party affiliate card. A good example is the American Express Starwood Preferred Guest card.     Every month when my statement closes, I get a direct deposit from American Express of Starwood points to my Starwood account.   From that moment on, those points are mine alone, and Amex has no power to touch them.    The same is true of Delta miles accumulated with the Delta Amex or American Airlines miles earned through a CitiBank card.

Which System Is Best?

The Cash Back cards are pretty foolproof, so long as you don’t get heavily invested in an annual return that is based on your membership at some point in the future.   The Costco card is fairly competitive, but I really don’t want my cash being withheld until February of 2011 from purchases I make this January.   In the best case scenario, they are keeping my money for over a year.    In the worst eventuality, they could arbitrarily decide to cancel my card at the end of the year, and I forfeit everything.    Let’s just say I am not interested in leaving a few hundred dollars up to the whim of American Express and Costco.

I am not too excited about bank sponsored loyalty programs either.   It is not that I am worried about my account not being in good standing, it is just that they usually provide less valuable rewards than third party loyalty cards.   This is because the third party, like an airline or hotel chain, is able to offer rewards from excess inventory at very low cost to themselves, while they count on card holders to be more loyal to their brand with their purchases.    It is that higher rate of return, along with the irrevocable reward points and miles that makes me a big fan of third party reward cards like the Starwood Preferred guest Amex.

Gaming The System

Some have discovered that you can cancel your credit card within thirty days of the annual fee and have that fee refunded.   There are even some who have reaped bonus points, only to later cancel their card.     I find this a little ethically dubious.    I have never done it, and I suspect there are only a few cards in which you can get the sign up bonus, and then cancel the card with a refund of the annual fee.   I am torn.   Part of me thinks that this is the kind of loophole that banks always exploit when it is in their favor, while the other part of me really doesn’t want to play at that level.

What do you think?

This entry was posted on Thursday, November 12th, 2009 at 20:00 and is filed under News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.