Customers are always looking for ways to get the most out of their credit cards. Signing up for a card that participates in a rewards program is among the top choices. However, not all credit cards offer the same rewards or and most come with unique perks.
Families looking to apply for a rewards credit card must understand how they work. Otherwise, they may end up spending more money in additional fees and higher interest rates, without enjoying the benefits offered as reward. In this article, we discuss that are reward credit cards and when it is worth having one.
What Is A Rewards Credit Card?
A rewards credit card is a financial product that offers customers incentives and additional benefits for frequent use. When customers use a rewards credit card to purchase goods or pay bills, they accumulate credits or points according to how much they spend.
Rewards credit cards have been around for years, though they are growing in popularity. According to an Experian survey, around 45 percent of consumers plan to apply for a rewards credit card instead of a regular one. This is because some rewards can help customers save thousands of dollars if they use them responsibly.
Rewards credit cards can be classified according to which incentives are being offered. The first group is cash back credit cards, which offer customers a rebate for purchases made with the card. This rebate, or cash back, is often awarded as credit. Most cash back credit cards offer one percent rebate on total amount spent. However, financial institutions have recently introduced new cash back credit cards offering 1.5 percent instead.
Customers with excellent credit scores are given access to luxury cashback cards, which offer between 2 and 2.5 percent return on purchases. Citi’s Double Cash Card, for example, offers customers 2 percent cash back on purchases. However only 1 percent is awarded right after purchase. The rest is given as customers pay their monthly bills. In some cases, customers can earn more cash back if they purchase goods as part of ongoing promotions. Not all transactions qualify for cash back. Balance transfers, for example, do not count for this benefit.
The second group is travel rewards credit cards. These cards are often affiliated to airlines or hotel chains, and offer flight miles or points as rewards per purchase. The amount of flight miles awarded varies by card, but most offer customers between one or two miles per dollar spent.
For example, the Chase Sapphire Preferred travel credit card offers customers two points per dollar when they purchase flight tickets or pay restaurant bills. For any other purchase, only one point is awarded. However, the card awards customers a one-time bonus of 50,000 points if they spend at least $4,000 within three months of opening the account. Once earned, customers can choose to exchange their 50,000 points for $500 in cash, or $625 in travel expenses.
The third group is known as bonus points credit cards. These cards award a certain amount of points per dollar spent, just like travel credit cards. However, these points can only be redeemed for specific services or goods that are sponsored by the credit card company. Most bonus points credit cards offer rotating rewards, which means customers can get additional points when purchasing some products during a specific time of the year. For example, customers may get extra points on gas purchases during the summer, or movie tickets during winter. The list of prizes that can be redeemed with points also changes constantly.
Why Banks Offer Rewards Credit Cards?
The main reason why banks offer rewards credit cards is to attract new customers or incentivize existing ones to increase their spending. In 2016 alone, 27 percent of all credit card spending was made with a rewards credit card. With more consumers asking for reward credit cards each year, that number is only expected to rise.
The key here is that reward credit cards often have higher interest rates than non-reward offerings. For example, the Chase Sapphire Preferred has interest rates between 18 and 25 percent. However, U.S. Bank’s Visa Platinum credit card offers interest rates as low as 14 percent, with longer promotional 0 percent interest rate than most reward credit cards.
Higher interest rates means financial institutions often make more money when customers use reward credit cards. This is because, on average, only 42 percent of consumers pay their credit card debt in full each month. Also, many consumers tend to overspend when using their credit cards, which also has an affect on how profitable rewards credit cards can be.
Do Reward Credit Cards Have Annual Fees?
The majority of reward credit cards come with annual fees. The most common sum is $95, which financial institutions often waive during the first year to make their cards more attractive. However, most luxury reward credit cards have much higher annual fees.
For example, the Chase Sapphire Preferred rewards credit card has a $0 introductory annual fee during the first year before switching to $95. In contrast, the Capital One Quicksilver One rewards credit card has a much lower annual fee of $39, though it is not waived during the first year.
Premium and luxury rewards credit cards often come with more benefits than regular one, but at a much higher annual fee. The Chase Sapphire Reserve premium travel rewards card, for example, comes with a hefty annual fee of $450. This card gives customers exclusive benefits such as triple points on travel and dining, an annual travel reimbursement of $300, and access to luxury airport lounges.
Not all rewards credit cards have annual fees. In general, only travel and premium rewards cards are offered with annual fees. Most cash back rewards credit cards, such as the Citi Double Cash Card and Discover It Cash Back, have no annual fees. This means customers who constantly use their cards can take full advantage of the cash back program without worrying about losing part of their savings to annual fees. However, other charges such as cash advance, expedited payment and foreign transaction fees may still apply.
Is A Rewards Credit Card Worth It?
A rewards credit card may be worth having under certain circumstances. For example, customers who are used to paying off their entire balance each month may find these credit cards attractive. This is because by paying off their balance each month, they avoid interest payments which can eat up any benefits offered by the card.
Rewards credit cards may also be useful to help customers pay for specific items that often receive higher bonuses. For example, a customer can rely on their rewards credit card to pay for dining and gas purchases, redeem enhanced bonuses, then pay off their balance.
Customers are advised to read the fine print before deciding to move spending onto a rewards credit card. Most financial institutions have limits on how much customers can receive from rewards programs. For example, some cash back credit cards award customers up to $1,500 in cash back per year. Any extra spending will not be counted. Other cards only award bonuses for purchases made in participating stores or brands. Also, some rewards programs have minimum redemptions which can take months to reach.
Another factor to consider is annual credit card spending. For example, a customer who signs up for a two percent cash back credit card with annual fee of $95. They will have to spend at least $4,750, and pay off their balance each month, only to earn enough cash back to cover the annual fee. Customers can avoid this issue if they apply for a credit card without annual fees. However, they often come with weaker benefits.