What You Need to Know About Rewards Credit Cards
In recent years more and more credit cards have been offering different types of rewards as incentives to attract clients.
These incentives and rewards come in different forms, but they are all designed to encourage you to use your credit card more in return for receiving a benefit. The type of rewards you can earn, and their value can vary significantly depending on the card you use.
Different Types of Credit Card Rewards
There are three main categories of rewards. These are:
The cash rewards can help reduce your credit card balance. Travel rewards can help you earn free trips for yourself or others. You can use rewards to purchase holiday and birthday gifts. In some cases you can also use the rewards to pay for other financial products, such as making an extra payment on your mortgage.
These are the most straightforward and simplest to use. However, you should consider that they may not always translate to actual dollars in your hand since some card companies only allow you to redeem your cash rewards as a credit to your account.
Other cash rewards credit cards may give you the option to cash in your rewards for a check or direct deposit to a bank account. You also may be able to redeem your cash rewards for gift cards with your card issuer’s merchant partners. There may be a minimum redemption amount—$25, for example—or a requirement to redeem your rewards in certain increments.
Points rewards are based on how much you spend. For example, you might earn one point for every dollar you make in purchases. In some cases the number of points you can earn may change after you reach a certain level of spending. Depending on the card issuer, you may be able to redeem your rewards for gift cards, cash, or even travel. Redeeming your points for gift cards may give you more bang for your buck since many merchant partners give you 10% to 20% off the gift card price.
These cards earn you miles that you can redeem for travel, such as airline tickets. The number of miles you can earn varies by credit card, and the number of miles you need to purchase a flight varies by frequent flier program. You may be able to convert miles between programs, but you may lose some points in the conversion process.
The Two Main Types of Rewards Programs
There are two main types of rewards programs. In some cases you earn a flat rate of rewards on all the purchases you make. As an example, a credit card may pay a 1% cash back rewards or one point for every dollar you charge to your credit card. These are referred to as Flat Rate Programs.
In other cases, you could earn a certain rate of rewards in certain spending categories, such as gas and groceries, but smaller rewards on other categories of spending. These are sometimes referred to as Tiered Reward Programs.
What to Look Out For
You generally need to have a decent credit score to qualify for most rewards credit cards. If your credit score is not great, you may find it difficult to get approved for a rewards credit card. Learn more about credit scores and how to improve it.
Cost is a key consideration since annual fees are common with rewards cards, sometimes hundreds of dollars per year for higher-tier rewards. Furthermore, rewards cards often have higher interest rates than other credit cards, so you should aim to not carry a balance on a rewards card.
There may also be requirements for earning rewards buried in the fine print of your credit card terms. As an example, a program may advertise a certain percentage cash rewards, but there may be a limit on the rewards you can earn at a higher rate. Some of these details can make it hard to redeem your rewards.
You should be aware that many credit card issuers sometimes change their rewards programs without warning, so make sure you read everything that comes with your billing statement.
Keep in mind that the reward you earn usually expire after a period of time. The best reward programs don’t let your rewards expire, but most programs will forfeit your rewards if you fall behind on your credit card payments.
The crucial thing to remember is to do your homework and thoroughly understand the details of how the credit card program works. By investing time upfront doing your homework, you can ensure you select the right credit card, or you may reach the conclusion that the benefits you receive from that credit card don’t justify the fees you pay for it.
Finjoy Capital is not a financial advisory firm.
This article is for informational purposes only and is not a substitute for individualized professional advice.