Credit Card Rewards Programs 101

Many of today’s credit card providers attract new members by offering rewards programs. Whether you're attracted to airline miles, hotel points, store coupons, points you can redeem through an online store, or a donation made to your favorite charity, be sure to fully understand what type of rewards program you’re signing up for. Know the rules and restrictions so that you end up with actual rewards and not disappointments.

Start by researching the different types of programs available:

  • Cash-back credit card programs encourage cardholders to use their cards exclusively to realize the most cash back possible. Typically each dollar you charge is eligible for a percentage of cash back. Be sure to read the terms and conditions of these types of offers to see how much you would need to spend to earn the cash back, how frequently you would receive rewards, and what restrictions may apply.
  • Airline mileage rewards cards. Many credit card issuers partner with airlines to reward frequent travelers with airline miles. If you are considering one of these cards, be realistic about the rewards’ actual value to you. Typically you receive one point for every $1 you charge on the card. On average, you’d need to redeem 25,000 to 50,000 points to receive one airline ticket. That’s equivalent to spending $25,000 to $50,000! Let’s say you’re interested in a flight that normally costs $400. Unless you are paying your balance in full each month, it’s more cost-effective to independently save up the $400 and pay cash for the ticket than to run up charges and then have to repay what you owe plus interest.
  • An affinity credit card program promotes a specific organization’s brand each time a member uses the card, which has that group’s logo and/or name printed on it. The organization may receive a bonus for each new account generated and a percentage of every transaction charged. In some cases it may extend a profit-sharing arrangement to its cardholder members. Affinity ventures are typically made with companies like Visa or MasterCard and are offered by many universities, alumni organizations, retailers, sports teams, and charitable organizations. Many affinity programs allow you to earn points that you can redeem through the organization such as discounts at your alma mater’s campus store, tickets to an NBA game, or points to use in-store.
  • Store credit cards allow you to purchase products that you need now and pay over time by making monthly payments. Many stores offer deals like very low or no interest rates if you repay the charges within a set period of time. Often, stores offer special discounts, coupons, and other rewards to cardholders. When considering these cards, be sure you understand the interest rate—and if it will be raised after a certain length of time. Also find out if there is an annual fee.

Regardless of the credit card program you choose, keep in mind that just because you are earning free points or other rewards do not give you license to spend. Compare interest rates, annual fees, and any late-payment or other fees associated with a card. Strive to find ways to get by without using a credit card, and only charge when necessary.

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