The Complete Guide on Credit Card Reward Programs - Elite Personal Finance
Credit Cards

The Complete Guide on Credit Card Reward Programs

EPF Last Update: November 2, 2018

People can make a lot of money with credit card reward programs. Finding the right for you will definitely make you save and make much more. Many studies prove that people lose millions with credit cards.

The purpose of this guide is to help you get the most out of your reward programs.

Remember that a good number of reward programs out there are not what they appear to be and therefore if not careful, you might end up falling into a trap. This guide will cover the following areas.

  • What is a credit card reward program?
  • Types of credit card reward programs.
  • What you need to qualify for a reward.
  • What to look for when shopping for credit card rewards.
  • Getting the best value out of your reward points and miles.
  • Common myths about credit card reward programs.

What is a credit card reward program?

With the cutthroat competition in the credit card industry today, issuers are getting out of their way to find ways to entice consumers to use their cards.

One way to attract potential customers is by offering incentives tied to the amount of money spent with their card.

A credit card reward program is, therefore, an initiative by card issuers to reward you for using their credit card frequently.

Types of Credit Card Rewards.

Credit card rewards either come in cash, points, or miles. Cash rewards are the most straightforward even though they do not always pay you in cash.

While a good number will send you a check or make a direct deposit to your bank account, others will require you redeem the cash reward for gift cards to be used with specific merchants.

Points, on the other hand, are tied to a specific amount and can be redeemed into cash, gift cards or miles.

For instance, a given card may issue a reward point for every $0.50 spent redeemable at 5000 points.  This means that you will have to spend at least $2500 to be able to redeem your reward.

Points’ rewards include hotel reward cards and auto reward cards.

Which is the best option – Points, Cash, Travel or Gift cards?

If your card issuer allows you to convert your points into gift cards, then we recommend that you go for it.

This is because merchant partners often offer 10 to 20% off the gift card price. With gift cards, you are likely to get more value off your points than if you redeem them for cash or travel.

If you are struggling to pay your credit card debt, then the cash reward can go towards reducing your balance. Miles rewards can go a long way in helping you to save on travel.

Some credit card providers such as Fidelity Investments and Wells Fargo provide options where you can invest your rewards or better yet use them to reduce your mortgage payments.

Others may give an opportunity to donate your rewards to charity. There are many other options out there, and it is for you to match your needs with the best provider.

It is important to note that rewards structuring for different credit card providers vary. Some may offer smaller rewards for purchases up to a certain threshold and bigger rewards after that.

We cannot stress enough on the need to evaluate the details before you settle on a specific program.

What you Need to Qualify for a Credit Card Reward.

Most credit card issuers have specific requirements that must be met to qualify for their rewards. The most common include;

  • You have an Excellent Credit Score.

The best reward programs are only available to cardholders with a credit score next to excellent. If your score is between 600 and 650, you may qualify for some cash back cards, but you are most likely to get a denial.

Given that denials can further impact your credit score negatively, we recommend that you wait until your score is higher.

A credit score between 651 and 700 is a bit better but may only qualify you for introductory reward cards. The better place to be is between 701 and 750 even though there are some cards you may not be eligible for. However, we can confidently confirm that a score in this range qualifies you for most travel rewards cards.

If your score is above 750, then you’ve probably received a lot of credit card offers in the mail and your only worry is to determine the best.

  • You generally do not carry a balance.

Reward cards usually come with high APRs and therefore may not be worthwhile if you carry a balance. This is because the interest charges you accumulate are likely to cancel out the value of your reward.

  • You are disciplined and committed.

While this is not a requirement with the card issuer, you need to assess your ability to control borrowing instincts and also pay the debt within the required timeframe.

If you are not disciplined, there is a high likelihood that you might find yourself racking up debt in the name of chasing reward programs.

Remember that freebies have the power of making us act irrationally especially when we are not self-aware.

What to look for when shopping for credit card rewards.

When looking for a reward credit card, there are some things you need to put in mind to identify the best opportunities.

As mentioned earlier, there are three types of rewards commonly issued by card providers. These include cash, points, and travel.

This means that before you decide which program to go for you have to evaluate your lifestyle. For instance, if you are a regular traveler, an airline card or a hotel card may be the best choice for you. A gas reward credit card may also be a good option for travelers.

Likewise, if you are a shopaholic, cash or points that can be redeemed to gift cards may be the most prudent choice.

Getting the Most out of your credit card reward programs.

On top of selecting a reward credit card by your spending habit, there are a few other things that you can do to get the most out of the reward program. Here are a few top ones.

  • Capitalize on reward cards with bonuses.

Some reward credit cards come with bonuses for signup or certain types of purchases. The signup bonuses are usually for a limited time while the purchase bonuses are tied to specific brands.

For instance, a card issuer can award a cardholder six points for every dollar spent on a given brand and two points for every dollar spent on everything else. This means that you earn more points by spending more on brands tied to the reward card you hold.

Also, some cards offer bonus points when you send referrals to them. This may be an excellent way for you to earn extra reward points.

  • Know what doesn’t generate rewards.

It is essential that you do your research well to determine what generates rewards and what doesn’t. There is a high likelihood of getting carried away and trying to use your reward card for everything in the name of earning rewards.

The most common mistake people make is to use their cards for cash advances and balance transfers. With most credit cards, these activities do no earn you any rewards.

  • Pay off balances as required.

Remember that a reward credit card is still a credit card and the repercussions of missing a payment or not paying your entire balance every month can be hefty.

While keeping a balance increases your interest payments, missing a payment usually means that you forfeit the reward you have earned. It is important that you keep away from reward credit cards if you are not confident in your ability to pay.

When you subscribe to a reward credit card, ensure that you create and maintain a monthly budget to ensure that you only spend what you can afford to pay off. Also, keep an emergency fund to cover for any unexpected expenses that arise.

  • Take inventory of your existing accounts.

Ensure that you regularly check the terms and conditions of your rewards account and follow up with the customer care when not sure. Review your lifestyle now and then to determine if the rewards match up with your needs.

Common Myths About Credit Card Reward Programs.

With credit card reward programs gaining popularity by the day, there is a lot of misleading information out there about them.

Here are some of the most common myths.

  • Pursuing credit card rewards will ruin your credit score.

This myth is derived from the fact that new credit is among the factors considered when calculating a credit score.

However, it only accounts for 10% of the score and therefore a few applications per year do not have much influence on your credit score in the long term.

What you should pay more attention to is your ability to pay your balances fully and on time.

  • You can earn rewards when carrying a balance.

As mentioned earlier, failure to pay your balances in full translates to high annual interest charges thus offsetting any rewards that you have.

Let’s say you have a card that charges 20% APR and gives a 3% cash-back for every purchase worth $2000. If you hit the $2000 target, you will have earned $60 in rewards. This is great but remember that if you do not clear the balance that month, you will pay the 20% APR which translates to $400.

Missing payments entirely means that you do not receive any rewards and you incur extra charges and penalties on top of interest payments.

  • There is nothing as free miles and points.

Some people believe that credit card rewards are nothing but a trap to get them into debt. While we cannot guarantee that all reward programs out there are genuine, we can confirm that most are.

You need to do your homework well to ensure that you get into the right program.

  • The rewards are not worth the effort.

If you take your point-earning scheme seriously, you can easily earn thousands of dollars of cash back each year.

Bottom line.

Credit card rewards are a great way to save on travel and shopping among other benefits. Before you subscribe into a credit card reward program, always evaluate your needs and select the offers that match them.

Remember that the biggest mistake you can make with reward credit cards has balances or miss payments.

Elite Personal Finance

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