Used well, reward programs like Air Miles can come in handy. The savvy shopper can rack up points and uncover some serious savings. But if you want to reap the full benefits of these programs, without succumbing to their traps, you need to understand how they work.
We take a quick look at how to get the best out of your reward credit cards.
Types of Reward Credit Cards Programs
Cash Back Reward Cards
A cash back credit card program gives a cash rebate on purchases you make with the card. You get a percentage back of a purchase, which often varies depending on what you’re buying. For example, many cash back cards give a higher percentage back for gas and grocery purchases than for general purchases.
When using a cash back reward credit card, it’s important to know the details. As well, a higher percentage return usually comes with a higher annual fee. So make sure the reward is worth more than the fee. Also, be aware of any limits, some cards have a maximum monthly reward.
Finding a good cash back card for you means finding the one that meets your spending habits and has a fee lower than your rewards.
Point Reward Credit Cards
A point reward system is similar to cash back credit cards. The user gets reward points in exchange for using the card, usually about coming out to about 1% of the purchase. The points are redeemable for rewards like gift cards, bikes, electronics, etc. Air Miles is probably the most well-known point reward system.
Point cards may provide more points for specific purchases or for more frequent use. Most have no annual fee and can be worthwhile for people so long as they pay off their card on time. Ideally, it’s best to find a point reward card where you can redeem points for something you want or need.
Travel Reward Credit Cards
Travel reward credit cards generally operate much like point reward cards, with a travel focus. They may offer points towards hotels, flights, or both. Points earned through purchases are redeemable for free upgrades, accommodations, or flights. Some even offer discounts or admission to amusement parks and attractions.
These types of rewards can come with higher annual fees. For the frequent traveller, these cards are often worthwhile.
Gas Reward Credit Cards
With the exception of electric cars, just about every driver would love to pay a little less for gas. Some gas cards offer just that. Gas reward cards usually offer either a rebate on gas purchases or point rewards for purchases.
These cards can come as either general or branded. The branded cards offer a better reward, but only at that brand’s locations. The general work everywhere, but offer a lower reward. If you always/usually go to the same gas company, a branded card is best. If you’re often at different stations, a general gas reward credit card is better.
Sign-Up Incentive Reward Credit Cards
A common tactic to get people using a credit card is to offer incentives. The incentives can range from a cash or credit reward available upon sign-up, or receiving a gift. For example, at basketball games, credit card companies often offer t-shirts and team merch in exchange for a credit card sign-up.
The sign-up incentive is something you only get once, so be aware of what you’re signing up for. They’re best when the card would appeal to you without the incentive, so it’s just an added bonus. They’re worst when the reward is the only reason to apply for the card.
One of the worst examples of this is at the aforementioned basketball game. Some people who go to games frequently will always sign-up for a card to get the merchandise, and then cancel it or not use it later. If you do this regularly it can affect your credit score, because they have to run credit checks on you every time you sign up.
Retail Reward Credit Cards
Retail reward credit cards are cards offered by stores, often big-box retailers or supermarket chains. Even some online stores, like Amazon, offer retail credit cards. These cards commonly come with sign-up incentives and/or point reward systems, all redeemable for in-store purchases.
A store reward credit card can work exclusively at that store or can work anywhere, just as a regular credit card does.
Retail reward cards are usually easy to get, even with poor credit. But their interest rates are often much higher than other credit cards. These cards are most worthwhile if you always pay your balance off fully and on time, and you shop at the location frequently.
Traps & Pitfalls Of Credit Card Reward Programs
Even the most well trusted and best credit card rewards have their downsides. The goal of these programs is always to make money off of the users. So it’s worth understanding how the card provider stands to benefit.
The better the reward, the higher the cost. Don’t be blinded by the rewards. Always check the fine print for annual fees, sign-up fees, and interest rates. Credit cards with the best rewards usually have the highest fees. Check your cost-benefit to make sure the rewards you will receive outweigh the costs.
Beware of easy cards to get. Most of the time, the easier it is to get a card, the higher the interest rate. A credit card you get immediately from someone at a kiosk usually has a high rate. Same for cards that you can get even with bad credit. If you’re using one of these cards it’s important to always pay them off on time.
For branded retail, travel, and gas cards there is the obvious benefit of encouraging users to spend more at that location. As a rule, these programs are best for people who shop at those locations regularly. The rewards are generally small, so you don’t seem much of a benefit unless the card gets frequent use.
How To Use Credit Card Rewards To Their Full Potential
To get the most out of your credit card rewards explore your options and consider your spending habits. Make sure that the costs and fees are less than the reward you will receive based on your current spending habits.
As well consider the type of shopper you are. If you’re a brand-loyal shopper you may stand to benefit more from branded or store-specific cards.
Don’t outspend what you can pay off. Reward credit cards usually have higher rates and make the bulk of their money off of people who carry the balance on the card. You should always pay off your rewards credit cards in full and on time.