Six questions to ask before getting a branded credit card

Author: Kimberley Palmer/NerdWallet
Published: Updated:
Photo by AP.

When Starbucks launched a rewards credit card this year, and when Uber did so last fall, it was a big step as far as each company was concerned. But they were only following the lead of hundreds of other brands.

Amazon, Costco, Target and many other brands have offered credit cards for years. These cards usually give customers higher rewards for in-store shopping than they would earn with a general-purpose credit card.

But these co-branded cards, as they’re called, also come with downsides, including higher-than-average interest rates and, in some cases, annual fees. In general, their redemption options are more limited than what you find on a general rewards card.

One key factor in getting a brand’s card, says credit expert John Ulzheimer, is how often you shop with that particular brand. “If you frequent the retailer enough, then you’re really getting a lot of value for the points,” he says.

Ask these questions before you apply for your favorite brand’s credit card.

What is the rewards rate?

“You should ask, ‘For every dollar I spend, what percent do I earn back in points?’” advises Barry Kirk, vice president of loyalty at Maritz Motivation Solutions, which creates loyalty programs for companies. A 1% rate is pretty weak, while 5% or higher is more likely to make it worth your time, Kirk says.

“If there is a store you shop frequently at — say, Target — and you could do all of your shopping in one place, and the card gives you a 5% discount plus other rewards, then it could make a lot of sense,” says Andrea Woroch, a writer and TV personality who specializes in consumer savings.

Is there an annual fee?

“Rewards programs aren’t free,” Ulzheimer says, and sometimes the cost is an annual fee. The Starbucks card, for example, has a $49 fee, and to get the Amazon Prime Rewards Visa, you have to be a Prime member, which now costs $119 a year.

An annual fee doesn’t automatically make a card bad, but you have to make sure the benefits you get will exceed the fee.

Do you plan to carry a balance?

Rewards cards tend to come with higher interest rates than nonrewards cards. So anyone planning to carry a balance on a credit card should focus on getting the lowest interest rate possible instead of rewards, Ulzheimer says.

Will the card tempt you to overspend?

Woroch says she once had a Gap credit card that led her to buy more clothes than she needed. “I kept getting rewards toward Gap, so would get clothes. It got me in the habit of buying things I didn’t need,” she says. That leads to the next question:

How can the rewards be redeemed?

“You have to be very familiar with the limitations and restrictions on the card,” Ulzheimer says. If you can only redeem rewards with that particular brand, then it might feel too restrictive compared with a general cash-back card. “That’s why I like cash back as an alternative,” he says. “You can use your money to buy anything, anywhere, anytime.”

Does the card come with other perks?

Some co-branded cards offer exclusive cardholder events, early sales access or other experiences that boost the card’s value, Kirk says. If you’re a big fan of a brand, that could make its card attractive even if a general cash-back card would make more sense from a strictly financial perspective.

After all, Kirk says, consumers often make decisions with their heart and not just their brain. “They just think, ‘I want that brand in my wallet,’” he says. But asking these questions first can help ensure you’ll come out ahead financially, too.

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