These days, it seems like rewards credit cards are offered by just about every major bank and credit card company. It certainly makes sense given the tough economic climate and the fact that so many families and individuals are trying to stretch these dollars as far as they can. However, what are the benefits and drawbacks of using these cards, and is it really worth it to sign up for one? Here’s the scoop on rewards cards and why you may want to consider using one.
How Rewards Cards Work
Rewards credit cards work in a variety of ways, but the most common system involves earning for transactions on your credit card. When you make a purchase with the rewards card, you rack up more points that can be used towards a reward in the future. In some cases, every purchase earns points. In other, only certain types of purchases (such as gas, groceries, etc.) will earn points, or the amount of points earned will vary based on the type of purchase.
Once you’ve accumulated points, you can then redeem those points for a reward. Certain rewards credit cards only offer a specific type of reward, such as miles for air travel or cash-back. Others offer you a variety of options for how you spend your rewards points, including discounts at certain retailers or special gifts.
In addition to the rewards system, there are also automatic rewards credit cards that simply provide you with cash, air miles or another reward automatically as you make purchases. This type of rewards card does not require a specific action in order to redeem points. Instead, they are automatically loaded onto your card for future purposes.
Pros Of Rewards Cards
There are numerous benefits to using a rewards credit card, including:
- Extra cash: Cards that offer cash back rewards are some of the most popular options for rewards cards. If you use the card wisely, you’ll end up earning money on your everyday purchases.
- Automatic savings: Rewards cardholders can sometimes divert their cash back rewards into a savings account, 529 account or IRA automatically. By setting up this automatic transfer, cardholders can add to their savings on a regular basis.
- Gift card rewards: One way rewards cardholders have found to get lots of points or cash back is to purchase gift cards. Some credit card companies even partner with certain merchants to provide additional discounts for cardholders.
- Paying taxes: Some rewards credit card companies, such as American Express, allow cardholders to pay federal, state and local income taxes with their rewards points.
- Bonus rewards: Some people love that a rewards credit card allows them to splurge on things that they wouldn’t normally do. For example, you can use your rewards card that offers points for air miles to “save up” for a vacation.
Cons Of Rewards Cards
There are also some drawbacks associated with using a rewards card, such as:
- Higher interest rates: Because these cards offer rewards, they may also come with higher interest rates. This is especially true of the cards which offer automatic cash back rewards.
- High annual fees: While some credit cards offer very small or no annual fees, there are many rewards cards that require a relatively high annual fee to use.
- High limits: Some rewards cards require spending thousands of dollars in order to get rewards. If you don’t plan to spend that much on your card, it may not be worth it to get one (depending on the card’s spending requirements).
- Irresponsible spending: One of the biggest temptations is to overspend with a rewards card. Many cardholders convince themselves that making big purchases will be less expensive since they’ll receive rewards points or cash back in return. However, this type of purchase doesn’t really pay off unless the purchase is paid off in full by the following bill cycle. This is because the interest on an unpaid, large purchase will likely cancel out any rewards or cash back. It’s important to always pay off your bill in order to get the most out of your rewards card.
Reading The Fine Print
Rewards cards are notorious for their fine print that offers numerous restrictions or stipulations for use. This could potentially include caps on the amount spent that can goes towards rewards each month, a minimum expenditure that must be met before points are awarded or expiration dates for rewards offers. It’s critical that anyone considering a rewards credit card read the fine print before signing up.
After reading this guide you may wonder – why do credit card companies want to give you free money and other perks? Basically, offering a rewards card is a great way to attract new customers. By creating rewards programs, they can compete with other credit card companies for your money. However, it’s up to you to do your research to make sure you’re getting a good deal and that you’ll really save money by using a certain card. Always be sure to put in the time to read up on fine print before you sign up for a new credit card.