How Rewards Credit Cards Work

| Tedis Baboumian |

How Rewards Credit Cards Work

Rewards credit cards are credit cards that offer different types of rewards as incentives for using their card. This is done because the credit card industry is very competitive and companies that provide credit cards compete with each other for customers. If you’re wondering how rewards credit cards work, read on.

Types of Rewards Credit Cards

There are different types of rewards that may be offered when you make purchases with a rewards card, all of which are provided as a benefit of using the credit card. Types of rewards include:

  • Cashback – Cash rewards cards allow you to obtain either cash back or a statement credit for rewards that you’ve earned. Some allow you to trade this credit in for a gift card with a specific retailer. There may be a minimum amount you have to earn before you’re able to redeem these rewards.
  • Travel rewards – If you travel frequently, a card that offers travel rewards may be a smart choice. You can earn points or miles for every dollar spent, and travel points can be used for airline tickets, hotel accommodations, etc.
  • Intro bonuses – Credit card companies entice new customers by offering a bonus for spending a certain amount of money in the first few months you have the card.

Using rewards cards gives you a chance to get extra value from routine spending. However, be careful not to overspend just to earn rewards.

Tiered Vs. Flat Rewards

Rewards may be either tiered or flat. Those that are flat have the same level of rewards no matter where you use them, such as 1% on all purchases. Tiered rewards offer a different percentage on different types of purchases such as 3% on gasoline and 2% on groceries. There may be caps on how much you can earn.

Choosing a Rewards Card

The best rewards card is one that goes along with your typical spending habits. If you use your card frequently at restaurants and you get cashback every time you use it at a restaurant, that might be a good choice for you. If you’re a frequent traveler, earning points that you can use when you travel would benefit you. However, watch out for annual fees. While not all rewards cards have an annual fee, some of the ones with the best deals do, which may end up erasing the benefit of the rewards.

Qualifying for a Rewards Card

When the value of rewards being offered is high, it may make it harder to qualify for a particular card. Take care of your credit by always paying bills when they are due and avoid borrowing more than you can afford to pay back. Check your credit report periodically to make sure there isn’t any incorrect information being reported since errors on your credit report can damage your credit.

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