Reward credit cards are essentially well-enhanced loyalty programs. You earn the most rewards if you use your rewards card as your everyday credit card for as many transactions as possible. Reward credit cards are packaged in several types, each one offering rewards programs calibrated to suit particular spending patterns. But they all have the same basic premise: the more purchases you charge to the reward credit cards 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 points you earn is largely determined by the monthly spend made using the card. Aside from free flights, the frequent flyer credit card rewards may include free hotel stays, travel insurance, etc.
Credit Cards with General / Catalogue Rewards
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 programs are more straight forward. There are no points to accumulate; you will simply receive an instant reward from participating merchants. This could take the form of an immediate discount, a buy-1-take-1 offer, or buy X items and get the next free, etc.
Getting Value From Reward Credit Cards
Your credit card should fit your spending behavior 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 cannot pay off the entire amount due each month, point-based reward credit cards will be irrelevant. Rewards programs are partly funded through higher interest rates on purchases; if you pay your bills in full by the due date then you may avoid all interest charges, otherwise it could be very costly. Any balances not paid by the due date will attract the high interest rate. The cost of the high interest charges is likely to far exceed the value of any rewards earned.
Often rewards cards have an annual fee. Their value to you therefore depends on whether the worth of benefits you receive exceeds the cost of being in the rewards program. One quick way to measure that is to estimate how much you have to spend to get $1 of reward. One card may award you 1 point per $1 spend, whilst another gives 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.
A further method is the point currency concept developed by Cannex. Point currency gives you the spending value of your rewards points. 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 points needed the higher its value because you consume fewer points to get the 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 then 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 benefiting from a credit card scheme.