| Understanding Reward Credit Cards |
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It sounds like oxymoron when we use credit card and rewards in the same sentence. How could you feel rewarded when you pay 30% interest rate and late fees for missing payments? But if you take a closer look, you'll realize that credit cards have become an important part of our financial life and with a few exceptions, most people use them. So if you're going to use a credit card anyway to pay for your food and day-to-day expenses, why not get something extra from the credit card company? That's the whole idea behind the popularity of credit cards with rewards.
Reward from credit cards come in different formats, while some cards allow you to accumulate airline miles for spending, there are others who would give you cash back whenever you use the card. Based on your preference, you can pick and choose from a large pool of reward credit cards. If you're interested in reward credit cards, you can apply and get approved in minutes. A question most often asked is - why don't reward cards work in most cases? Why people get frustrated trying to redeem their reward points? Well, first of all, if you want to avoid the frustration later, you should pick your reward card very carefully. Also, get realistic in your expectations on reward redemption. Don't expect a credit card to get you a free airline ticket every month for spending $1,000/month. If something sounds too good to be true, it probably is.
Here are some common and popular reward cards on the market.
1. Cash Back cards - You get 1% to 5% back on your shopping depending on the item. Some cards offer 5% on gasoline purchase and 2% on groceries and 1% on everything else. So there is definitely a catch in cash back rule. You don't get a flat rate cash back on everything.
2. Airline Miles cards - Credit card companies purchase airline miles in bulk. For example, if Chase plans to offer a airline miles card. It buys mile from a certain airline and then distributes it to cardmembers based on the accumulation. The problem with airline miles cards is the limited choice of carriers. It is very unlikely that your miles would work on every airline. In fact, most of the time, it is just one airline. So if you don't have coverage in your area or don't like to fly with this carrier, your card is pretty much useless. British Airways has a great program where you can use your miles for flying on British Airways or partner airlines. It gives you one mile for every dollar spent and then you can easily redeem these miles for free tickets.
3. Reward Points - This option is better than just plain airline miles because you can use your reward point for hotel, car rental and even entertainment and food. Usually you get one reward point for every dollar spent with certain exceptions where you get two or more points. If you're interested in reward cards, make sure you compare then with cash back cards first because rewards points will eventually be converted to cash for you to use it. So if you get 1000 reward points for spending $1,000 and then your points convert only to $5 in cash, this offer is worse than 1% cash back.
4. Automotive Cards - Usually the financial unit of a big auto company such as GM, Ford, BMW offers this kind of cards. GM offers a credit card that accumulate points that you can use towards the purchase of a new GM vehicle. You also get cash back on GM parts and service at authorized GM dealerships across Unite States. So if you own or plan to purchase GM vehicles in future, this could be a good option. BMW of North American offers a BMW card that gives you one point for every dollar spent. You can then use these points to get a gift certificate that can be used to pay for the part and service at BMW dealers. Cash value of these point is equivalent to 1%. So for 10,000 point you receive a $100 gift certificate.
5. Electronics Products Cards - These cards are usually attached to one manufacturer. You can use accumulated points to purchase brand name products online or in stores. Sony card is a great program that offers you the option to purchase Sony products with your reward points. These type of reward cards are most restrictive since you can only get a certain brand. However, if you like a certain brand such as Sony, this could be a great deal.
As you can see, there are quite a few options for customer in reward card market. However, you have to evaluate your own situation before getting a card for rewards. For example, if you're looking to transfer balance, reward card may not be for you. Rewards are only awarded for new purchases and balance transfer would be excluded. Also, if you continue to use your new card in addition to carry balances, you might end up paying lot more in finance charges due to higher interest rate on new purchases.
One important aspect of reward cards that is often missed by customers is that they have to religiously use their cards for everything in order to accumulate any significant reward cash or point. Also, if you are not going to pay these cards in full every month, finance charges will nullify any reward advantage. So if you pay your card balances every month in full, then rewards card could be a great opportunity. |
