Have you ever wondered what a rewards credit card is and how it works? Read on to learn the basics about rewards cards, their benefits and things to be aware of when selecting or using a rewards credit card.
Rewards credit cards simply refer to credit cards that offer rewards and incentives for using the credit card for purchases. These rewards can come in many forms, but they generally include earning reward points or discounts for using the credit card, and depending on the credit card, these rewards points can be redeemed for flights, cash, vouchers, purchases etc.
Rewards credit cards also often offer other benefits aside from reward points and discounts such as free airport lounge access, free travel insurance, purchase protection, concierge service and more.
But why do rewards credit cards only offer incentives for purchases and not for cash withdrawal?
According to Credit Card NZ, one of the largest credit card comparison website in New Zealand, Credit card companies such as Mastercard, Visa and Amex only offer rewards on purchases because they make their money by charging transaction fees on purchases that you make using your credit card and NOT by the interest charged on your credit card balance. The interest charged on your credit card balance goes to your credit card issuer i.e. the bank, credit union, store etc – not the credit card company.
Rewards credit cards may be a good fit for people who:
- Have a good credit score
- Don’t carry a balance or only carry a low balance
- Travel frequently
- Make frequent purchases
Rewards cards might not be suitable for people who:
- Carry a balance on their credit card
- Have a low credit score
How do Rewards Cards Work?
As mentioned earlier, rewards credit cards allow you to earn points/rewards for every dollar you spend your reward credit card. The credit card company offers these rewards with the goal of getting you to use their card more often. As you spend, you earn more and more rewards and over time, you’ll earn points that can be redeemed for benefits such as air tickets, cash, vouchers etc.
Types of Rewards
You’ll find a wide variety of rewards cards available to choose from. Let’s take a look at some of the common types of rewards cards.
Credit cards with points
These credit cards typically offer reward points for each dollar you spend on the card. Points can be redeemed for a multitude of items and services, including products from an affiliate retailer, air ticket, hotel stays, magazine subscriptions and more.
Points are earned and spent in “real time”, meaning you can spend them as you accrue them. You don’t have to wait until you have a certain number of points before spending them. However, most points programs do have expiration dates—you must use the points by this date or lose them forever.
Cash back credit cards
These are some of the most popular rewards cards as the card company will pay you a certain percentage back on each purchase you make with their card. Typical cashback rates run about 1%, which doesn’t seem like much. However, if you use your card for everyday expenses (groceries, gas, etc.) cash back cards can save you money in the long-run.
Some premium cash back cards are available for those who have excellent credit scores. These cards may offer as much as 2% cash back. But you must have excellent credit to obtain one of these cards.
The key to using cash back cards is to know your spending habits, then use the card for everyday expenses, and then pay your balance off every month. This way you’ll avoid debt while also earning cash back!
Travel credit cards
These credit cards are typically affiliated with a specific airline or hotel chain. When you use the card, you’ll earn travel rewards points that can later be used to buy air tickets and hotel stays and more. The points for these credit card reward programs are generally known as miles; you may earn anywhere from 1.25 miles/dollar to 1.5 miles per dollar spent.
In addition, with some cards, it’s possible to earn even more miles when you buy flights or hotel stays with that card’s affiliated airline or hotel chain. Travel credit cards are very popular with frequent travelers, such as business travelers, etc.
Things to watch with travel credit cards— the redemption of miles may be determined according to an airline’s blackout dates. This means the airline will not allow you to use your miles on certain calendar dates throughout the year. The same can hold true for hotel travel credit cards. However, travel credit cards are a great option if you’re a frequent traveler and can help you save money while earning more miles. Redeem points and miles for products, services, and subscriptions with Points.com!
Ask these Questions to find the Best Rewards Card for You
What about my credit score?
What about my credit score—can I get a rewards card with bad credit? The short answer is that you need excellent credit and no, it’s not usually possible to get rewards cards if you have bad credit. You’ll have to read the terms and conditions of each card to see what financial requirements are necessary to obtain the card. Each card will have a minimum credit score required. Look for a card that matches your credit score.
What types of rewards are offered by each card? Again, you’ll have to read each rewards card’s terms and conditions to learn the specifics about their credit card reward programs. Before you even begin looking at rewards, it’s a good idea to choose the type of reward that best fits your lifestyle, credit score, and spending habits. Would you prefer earning cash back, rewards to use for other benefits, or earn points and miles for traveling? Make this determination before even choosing a rewards credit card.
How do you maximize rewards?
Now you’ve determined which cards offer the rewards you’d prefer, it’s time to consider how to maximize the rewards you’ll earn. If you’re a frequent traveler, then a travel rewards program will help you earn more rewards than a regular rewards card.
On the other hand, if you don’t travel but would be able to use your card for everyday purchases, then look for a card that offers a higher reward rate on these types of transactions. For those unsure what they’d prefer, then a cash back card might be the best fit.
What about sign up bonuses?
Rewards cards with high sign up bonuses might be a good choice if the choice you have some goal for redeeming your points (such as using the rewards to buy air tickets, hotel stays, etc.). Credit cards offering high sign up bonuses generally have a spend requirement, meaning you’ll have to spend a certain amount within a few months before earning that sign up bonus. So, look for cards that offer a minimum spend with a time limit you can meet more quickly.
Do the rewards expire—if so, when?
Another important bit of information you’ll have to research before choosing a rewards card. Read through the terms and conditions to see if points expire or if they just accrue as long as you have the account. It’s also a good idea to check if the rewards are subject to blackout dates—this mostly applies to travel rewards.
What about transferable points programs?
Some credit card rewards programs have transferable points. This means you can earn the points like normal, and then transfer these same points into another points program with program partners. For instance, these rewards can sometimes be transferred into airline frequent flier or hotel frequent guest programs.
One note—the points may lose value when you transfer them, so be sure to read all the information possible for your rewards credit card and the credit card reward programs where you’d like to transfer points. This way, you can avoid some of the value loss, while obtaining the best benefits of transferable points.
What about the annual fee and interest rates
What about the annual fee and interest rates—are these higher for rewards cards? Yes, there are usually annual fees associated with rewards cards. These vary from card-to-card and can be $100 a year or more. The key is to find the lowest annual fee for a reward card that fits your financial needs. This way you’ll get more benefits out of them, even though you have to pay a higher annual fee.
Interest rates are also generally higher for rewards cards. However, some cards offer a 0% interest rate for a certain amount of time, so long as you meet any specific conditions.
Tips for Finding the Best Cards & Maximizing Rewards
Here are a few tips to help you choose the best rewards cards and maximize the rewards for your benefit.
- Know your credit score: before you apply, know your credit score and find the required credit score for each card you’d like to obtain.
- Know your spending habits and budget: review your monthly spending habits and your budget. With this information, you’ll be able to look for a card that fits your circumstances. In addition, create a plan to use your rewards card—don’t overspend just to earn points. Having a plan and knowing your budget and spending habits will keep you on track and out of debt.
- Take advantage of sign up bonuses where possible: sign up bonuses can quickly help you earn tens of thousands of rewards. First, make sure you know the card’s spend requirement and the amount of time you have to meet that requirement (this will be a certain number of months).
- Choose no-fee cards: some rewards cards waive the annual fee for the first year. However, if you plan on canceling the card before the annual fee is due, you’ll end up hurting your credit score. Canceling a credit card reduces your credit score, at least shortly.
And don’t overlook the fact that some rewards cards are fee-free—you won’t face an annual fee. You can still find rewards worth earning with these cards and avoid the extra fees.
As you can see, there are a wide variety of credit card reward programs available. Do your homework to find the best card for you and your finances. This means knowing your spending habits: your monthly/yearly budget, and reading all the terms and conditions for each card you research. Be informed and use your rewards cards in the right way, pay off your balances each month, and you’ll enjoy all the benefits rewards credit cards have to offer.