Bustling through crowded malls, fighting holiday traffic, lugging large bags around that feel like they have a ton of concrete in them, ever been shopping and felt like you were at your second job? Even a trip to the grocery store can be tedious at times. Ever thought it might be cool to be getting something in exchange for all this hard work? Guess what! There actually are people that will “pay” you for buying stuff. And I’m not talking about becoming a secret shopper either. Enter, the rewards credit card.
What is it?
A rewards credit card is any credit card that gives you incentives for using it. These incentives, or rewards points as they’re commonly called, come in many forms. There are rewards cards for gas, groceries, cash-back, merchandise, travel and more. You’ll get a certain amount of rewards points (or miles) for items purchased in the particular specialty of your card. A standard rewards card might offer you 1 point for every dollar spent on all purchases. More complex rewards cards might have different point to dollar values for different purchases. For instance, you might get 1 point for every dollar spent on normal purchases but 2 points for every dollar spent on dining.
What’s it worth?
The redemption rates can vary drastically based on the rewards card you choose. A good rule of thumb is that usually you can expect 1% back in rewards. In other words, 1 point can be redeemed for $.01. So if you have 10,000 points you’ll be able to receive $100 in the specialty of your card. That may not sound like a lot but if you use your card for everyday purchases it can actually add up big time. Not to mention many cards offer 2, 3, 4, or even 5% back in rewards. You can also raise your redemption rate by using your rewards program to its fullest or by transferring points from one program to another.
Differences from traditional credit cards
Rewards credit cards differ from traditional credit cards in a couple ways. The most apparent are the lucrative sign-up bonuses. Some rewards cards offer upwards of 25,000 bonus points or more. Depending on the card, those 25,000 bonus points could mean a roundtrip domestic flight. Other cards may allow you to convert those points directly into cash which could give you up to $250, assuming 1 point = .01. It’s not all gravy, to get the sign-up bonus there is always a spending or transaction requirement that must be met. A more negative difference is that most rewards cards have sky high interest rates. Some card APR’s can be in excess of 19%! Along with those interest rates usually comes a hefty annual fee. These can range from $75 to over $400 depending on the card. With that said there are ways to avoid the interest simply by paying off your card in full each month. As far as the annual fees, many cards waive the annual fee for the first year. If that isn’t an option the fees can sometimes be offset by the benefits of the card, like a lucrative sign-up bonus. Other times you might just use the card so frequently that the annual fee is of set by the benefits you receive when making normal purchases.
How to choose your card
The rewards card you choose should be based on your needs and interests. If you don’t go grocery shopping but eat out it’d make no sense to get a groceries rewards card, instead you might look at a card that gives rewards at a large number of restaurants you frequent. For me, the travel and hotel cards are the best types because I enjoy traveling on the cheap. It’s also easier to get more bang for your points because there are so many travel programs and numerous ways to transfer into and out of programs to maximize your miles.
Of course the potential incentive for the credit card companies could be much more lucrative than your rewards. However, If you use rewards cards intelligently they can be a great benefit. Best of all, once you understand how to use rewards credit cards you can actually beat the card companies at their own game.