Why Credit Card Rewards Aren't So Rewarding

It isn't impossible to get perks out of a rewards card for the spending you put into it, but it's surprisingly difficult.

According to a survey by NerdWallet, credit card fees and rewards are still perplexing to a whole lot of applicants. Fees for cash advances, late payments, overdrafts and foreign transactions remain a mystery, while many cardholders still don't quite grasp how to redeem rewards.

"The best card for you depends on your own specific needs and plans," says Matt Schulz, senior industry analyst for Credit Cards.com. "If a family trip to Disney World is in your future, it might be a good idea to get one of those cards. If you love cruises, a cruise line credit card can give some good perks. Or if you always stay with the same hotel chain or fly the same airline, it's probably a good idea to get one of those cards."

Unfortunately, these seem to be about the only variables applicants consider when getting their hands on a new rewards card. According to NerdWallet, although 87% say they keep fees in mind when applying for a card, 41% said they don't consider foreign transaction fees and cash advance fees when applying for a card. Nearly one-third reported being thoroughly confused by all credit card fees.

That isn't great, especially when foreign transaction fees on airline cards range from 0% to 3% of purchases. That means if you spend $2,000 in London, a 2% foreign transaction fee charge you an extra $40 just for the convenience. Meanwhile, while annual percentage rates on all cards average 19.97%, that jumps to 25.8% for cash advances (plus a one-time fee of roughly 4.5% of the cash borrowed).

"The big problem with pulling a cash advance from a credit card is the interest begins accruing immediately, unlike normal purchases when you have until the end of the month," says NerdWallet credit card expert Sean McQuay.

For all that cardholders don't know about the scarier portions of their rewards card, they know equally little about the rewards those cards are supposed to offer. Although 73% of cardholders consider rewards to be one of the most important factors when choosing a credit card, nearly one-third said they don't fully grasp how to earn rewards, and nearly one-fifth don't know the dollar value of the rewards earned.

Look at gas-station cards, for example. Although the number of consumers using gas cards is declining, 10% of Americans surveyed reported carrying at least one of these cards. The rewards on an average gas card equate to 4 cents per gallon, but the average driver used 583 gallons of gas in 2013, according to a 2015 University of Michigan study. That year, a gas card's 4 cents per gallon in rewards would have given a driver just $23 in return. However, at $3.62 per gallon in 2013, the same amount of gas purchased with a 3% cash-back card would have returned $63.

Cardholders also wouldn't have had to pay huge fees. The average APR gas cards was 26.7% while the average cash-back credit card had an APR of 18.9%. Granted, those gas cards don't have annual fees and don't require particularly good credit, but they also don't have a sign-up bonus for their users. Your average cash-back card gives a user $101 on average just for signing up. A hotel-linked card, meanwhile, offers a whopping $486 at signup.

That said, "free" cash can get costly. The average hotel card comes with a $96 annual fee. An average general-purpose travel card offers cardholders $433 just for signing up. However, to see any savings from a travel card with no foreign transaction fee, a traveler would have to spend an average of $151.90 in annual fees, and spend $5,063.33 abroad each year just to offset that fee. Also, while airline cards offer as much as $386 just for signing up, CreditCards.com's Schulz warns that those points only matter if you're using them or the card accruing them frequently enough to make the average $171 annual fee worthwhile.

"There's nothing that says that you have to settle for using just one card," Schulz says. "Use your Disney card for purchases while you're at the Magic Kingdom, but use your airline card to book your airfare. Just be sure that you don't apply for too many cards at once, as that can hurt your credit score."

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.