Reward credit cards are essentially well-enhanced loyalty programs. The best rewards are earned by the card holders who make their reward credit cards their default option when paying for purchases and other expenditures.
Reward credit cards are packaged in several types, each one offering rewards programs calibrated to suit particular spending patterns. While they vary they all use the basic appoach of the more you spend on your card the greater the rewards.
Types of reward credit cards
Frequent flyer credit cards. Points earned from a frequent flyer credit card normally go to the frequent flyer program of the airline you prefer. The number of points earned depends on how much spending is charged to the card. Aside from free flights, the frequent flyer credit card rewards may include free hotel stays, travel insurance, etc.
General reward credit cards. The credit card usually has partners in the program who provide the products offered for redemption under the rewards program. These items could be anything (the possibilities are endless) from gift cards, home appliances, holidays, shopping vouchers, magazine subscriptions, etc.
Credit cards with Cash-back. These cards offer a very simple program: your account is credited for a certain percentage of the amount spent on particular items. As an example the card may offer a rebate from participating gas stations.
Credit Cards with Instant Rewards. These cards offer even simpler programs. You don’t need to way to clock up points, you simply get access to special rates or discounts from partner retailers and merchants. The offer could be a discount, rebate or a bonus with items such as mobile phones.
Maximizing the benefits of a rewards credit card
Your credit card should fit your spending behaviour. If you use charge often and prefer not to carry any balances, reward credit cards that allow you to accumulate points should work best for you.
If you don’t pay your cad bills in full each month then it’s more than likely you won’t be suited to a points based rewards credit card. Reward credit cards usually have higher interest rates; the card companies recover the cost of running the rewards program partly from higher interest charges. Unpaid balances carried into the next payment period will attract the high interest rate. The ensuing interest expense would simply outweigh any benefits you expect from the rewards program.
Reward credit cards usually impose a membership fee. Try to work out how much you will earn in rewards each year based on your typically spending patterns and then work out your costs such as fees and interest.
One quick way to measure that is to estimate how much you have to spend to get $1 of reward. Not all cards award equally, some might earn you one point per dollar spent while another could offer 1.5 points per $1. In this example to redeem a reward worth 6,000 points you thus need to spend $6,000 on the first card and only $4,000 on the other.
Another method is the point currency concept developed by Cannex. Knowing the point currency lets you work out the spending value of the points you earn. All you need to do is divide the number of points for the reward item of your choice by the recommended retail price. The lower the number of points required the higher the points value are as you need less points for the same reward.
For example, one program may require 10,000 points to win an item worth $75 in retail, but another program may need 12,000 points. The point currency in the first program is 10,000 divided by $75 or 133.3 points per $1 for the first, and 12,000 points divided by $75 or 160 points per $1 for the other.
As far as the rewards item is concerned, the first program gives you better point currency. Note though that if you incorporate the first method and the example described above, you may need to spend $10,000 to accumulate the required points in one program (at 1 point earned per $1 spent) but only $8,000 in the other (at 1.5 points earned per $1 spent).
Your spending pattern and the offers from credit cards can change over time - try to keep tabs on whether you are still benefitting from a credit card scheme.
Article by Richard Greenwood of the Click 4 Group.
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