Shopping for a credit card can be a frustrating process. With so many options it can be difficult to hone in on what may be the best option for your current needs. You might be searching for the best terms for a balance transfer, or maybe you’re a rate shopper and looking to keep interest at a minimum. But, if you are anything like the majority of the population, you're looking for the rewards!
The majority of Americans have a rewards card , so the common mindset seems to be, if you’re going to be using credit, why not get a little more out of it. There are different types of reward cards, with varying benefits and rates, so it's best to get familiar with your options before you start searching and especially before you put in any applications.
First things first...
You’ll want to make sure your credit is in tiptop shape. Just like a great rate, benefiting from a credit card rewards program is largely dependent on having decent credit history. Lenders want to know that they can rely on you to pay back the balances you might rack up on your way to earning your rewards. Ideally, if you have a rewards card, you won't carry a balance on your card. If you can't pay your balance in full each month, before interest is accrued, it might not be a good fit for you since interest rates for reward cards are usually higher than other credit cards.
What are you looking for?
A rewards credit card will usually benefit you in one of three ways:
Points for Rewards
There are benefits and pitfalls to each, and again, it will ultimately depend on what will best benefit you, and your current needs. Most card shoppers are interested in more than just what perks they will get from the card. Other factors to consider include the card's interest rate, potential fees, and special offers.
When you make a purchase with your credit card, the merchant is responsible for paying what is known as an interchange fee. This fee amount can vary and is typically based on a percentage of the transaction total. This is how card issuers are able to offer cash back rewards and what you get back will depend on your credit card issuer’s rewards program. Your credit card company may have a flat rate system where you earn a certain amount or percent back on every transaction or it may be dependent on the type or amount of the purchase.
This one’s a no-brainer, right? Who doesn’t like getting cash back for spending money?! One of the best things about cash back cards is that you’re in control of how you get to enjoy your rewards! Rewards can be applied to your credit card balance, used towards purchases, or returned to you in the form of a check, or deposited to your bank account. Another plus, is that depending on the rewards program you decide on, you could be getting a better rate than traditional deposit accounts! And unlike deposit accounts, the IRS categorizes cash back rewards as rebates rather than taxable income so you won’t owe Uncle Sam for your rewards when tax season rolls around!
Things to consider:
The fine print; these rewards often come with caps or require that you spend a certain amount to qualify. This could negate the possible benefits of the rewards if you’re unable to justify the amounts you’re spending just to claim rewards. Like most reward cards, cash back cards come with higher rates and usually an annual fee, so it’s something you’ll want to consider when shopping around. Lastly, if you want to reap the benefits from as many categories as possible, you’ll have to do a little extra work by logging in to register for them periodically. While it’s not a deal breaker, we all know that life gets busy and if you’re not registered for the rewards, you’re just paying a fee and higher interest for nothing.
Points are a basic, no frills way to earn rewards for using your credit card. For every dollar you spend on a purchase, you are rewarded with a certain amount of points that you can use towards purchases. Some card companies even team up with retailers and offer higher point values for purchases made at select stores.
The upside of these points is that they can be easy to accrue, especially when you’re using your card for everyday purchases. Since card issuers often run promotions, you can rack up double and triple points during those periods. Let’s say you decide to make a purchase at a retailer that offers 3 points for every dollar spent, during a promotional period for triple points. A simple $100 transaction could earn you a whopping 900 points!
Things to consider:
Not all points are created equal. Some companies put a time limit on how long points are good for, giving you incentive to use them and then spend money to earn more. Another issue consumers might run into is finding that the redemption value of points they’ve earned doesn’t come close to what they were required to spend to get them!
The perks for travel rewards are pretty obvious, it’s called vacation. Most card issuers will team up with major travel retailers, like airlines or hotel chains to offer exclusive deals through the organization. In addition to the travel miles you can claim for rewards, there are other perks like free bags, priority boarding, and seat upgrades.
Things to consider:
While its great to get rewarded for travel, make sure the pros outweigh the cons. Travel rewards usually incur some type of annual membership fee, regardless of your credit score. So if you don’t have the time to actually reap the benefits, you’ll have to ask yourself if it’s worth the cost of the annual fee you’ll be charged.
Making a decision
Reward cards can be a great addition to your wallet, when used appropriately. These programs are not one size fits all, so if you're looking to get the most from credit card rewards, seek out a program that allows you to benefit from your normal spending patterns. Since rates on reward cards tend to run a bit higher than average, make sure your credit score will qualify you for the best rate available. Still have questions? Let us know!