For David Parada, a teacher in Ontario, California, there’s just something he likes about his Nordstrom JWN, -1.80% credit card, and it doesn’t have much to do with the value of the rewards he earns with it. “It feels like a membership for a club where not many people are admitted,” he says.
Many consumers make credit card decisions with their heart more than their brain. Instead of focusing on interest rates, rewards rates and redemption options, they are sometimes drawn to cards simply because they like the brand name on them. And with retailers like Nordstrom, Starbucks SBUX, +1.96% and Amazon AMZN, +0.01% slapping their names on Visa V, +0.62% and Mastercard MA, +0.07% credit cards that can be used anywhere, these so-called co-branded cards have a wider reach than old-fashioned store cards that could be used only at the retailer itself.
Those cards, however, are often not the best choice for a consumer. Co-branded credit cards tend to have higher interest rates, less flexible redemption options and sometimes lower rewards rates, unless you are shopping at the co-branded store itself. Some charge an annual fee. Store cards are even more limited, although they can be easier to get even with a credit score below 690. (Credit scores above 690 are considered good or excellent.)
Unless you are a frequent shopper at that particular brand, you might be better off choosing a general cash-back or rewards credit card instead. But trying to convince people of that can be as fraught as telling them to root against their home team — it goes against their basic instincts.
“People make decisions based on emotion,” says Mario Natarelli, managing partner at brand consultancy MBLM. “We like to think of ourselves as rational, but when we make decisions, emotion triggers that process,” he says. We might end up applying for the credit card that has our favorite brand on it instead of the one that is actually the best fit financially.
Is a co-branded card the right fit?
In some cases, a co-branded card from your favorite company might be the best choice. If you shop frequently at a certain retailer, then using that store’s credit card could generate significant rewards. The Amazon Prime Rewards Visa Signature Card, for example, earns 5% cash back on Amazon and Whole Foods purchases along with 2% back at restaurants, gas stations and drugstores, and 1% back on everything else. For frequent Amazon and Whole Foods shoppers, those rewards add up quickly.
The Uber Visa Card is another co-branded card with broad appeal: It allows cardholders to earn a relatively high 4% rewards rate for dining, 3% on hotels and airfare, 2% for online purchases and 1% on other spending. Points can be redeemed for Uber credits, cash back, or gift cards.
Other co-branded cards are more limited. The Starbucks Rewards Visa card, which charges a $49 annual fee, allows cardholders to earn “Stars” for spending that can then be redeemed for Starbucks items only — they can’t be turned into cash or travel rewards. Many consumers would be better off with a flat-rate rewards card instead.
Still, even experts sometimes let their brand affinities get in the way of optimizing their credit card rewards. Credit expert John Ulzheimer used to use a now-defunct TiVo-branded credit card. Instead of earning cash back or rewards points that could be redeemed for travel or at stores, he recalls primarily redeeming his points for TiVo accessories like coasters, pencils and erasers. “That’s probably not the best use of points,” he acknowledges.
Despite their limitations, co-branded cards might also offer other, nonfinancial rewards — such as the feeling of belonging to an exclusive club that Parada described — that you won’t get from a general card. Whether that perk is worth giving up for a card that offers more flexible ways to earn and redeem rewards, though, is up to you.