Being rewarded for using a credit card sounds like a dream come true, but you have to be savvy to avoid being taken for a ride by the credit card companies.

How They Work

These programs are intended to encourage you to spend money on your credit card. The basic idea is that you receive either points or cash for making purchases on your credit card. They can afford to do this based on the interest that they charge customers for credit card balances and the transaction fees that they charge to retailers. As they receive a transaction fee every time your credit card is used, it’s little wonder that credit card companies are so keen for you to use it as frequently as possible.

Choosing a Reward Program

Different credit cards have different reward progams attached to them. Typical rewards include:

• Cashback that goes back into your account as in the reward programs offered by American Express, Bank of America, HSBC, Capital One, Chase, Citi and Discover
• Cashback that can be “set off” against other purchases, such as money off a car or electrical appliances as in the Bank of America WorldPoints rewards scheme
• Air miles as in the American Express Membership reward program
• Points that can be redeemed for vouchers and gift certificates to spend in various retailers as in the Visa reward program
• Points that can be exchanged for purchases, such as free flights or appliances as in the Citibank Thank You and Chase reward programs

How Much Do You Need To Spend?

As I mentioned at the start of the post, credit card companies want you to spend as much as possible using your credit card so they set the rewards high to encourage this. Different reward programs will vary on how much you need to spend before you qualify for their specific rewards but it’s safe to assume that it’ll take some time to receive anything significant.

To gauge how long it would take to build up decent rewards, take a look at these examples:

• The HSBC Platinum Mastercard with Cashback credit card offers 1% cashback and the HSBC Platinum Mastercard with Cash or Fly Rewards credit card offers 1 point per dollar spent
• Capital One offers 1% cashback on regular purchases and 2% cashback on purchases made at gas stations and major grocery stores
• The Chase Freedom Credit Card offers 1% cashback on all purchases and $50 cashback on your first purchase with promises of up to 20% cashback on purchases from selected retailers
• The Citi CashReturns Mastercard offers 1% cashback on all purchases with a 20% bonus on the cashback that you earn on purchases made in the first 12 months of using the card
• The VISA Extras reward program typically requires 3,500 points to earn a $5 gift certificate for retailers such as Burger King, Starbucks and Subway and 10,000 points for redemption such as a Braun Oral-B battery toothbrush – the starting rate is one point per dollar spent, which may rise with further qualifying purchases
• On the Citibank Thank You reward program, you typically receive between 1 and 5 points per dollar spent depending on the credit card in question
• The Chase Sapphire with Ultimate Rewards credit card offers one point per dollar spent with up to 10 bonus points for shopping at specific online retailers

The Pitfalls

If you play your cards right (no pun intended!), choosing a reward program is just a matter of deciding which offers the best rewards for you. It is worth remembering that rewards may not be all that they seem. The airmiles may only let you fly to unpopular destinations in the middle of nowhere, or your gift vouchers may only be valid in the type of shops that you don’t actually want to shop in. Think long and hard before taking on a credit card reward program as you may not be getting the deal that you think you are. You may also need to spend a considerable amount of money to receive the better rewards. For example, you may need to clock up hundreds of thousands of points on the points reward programs to qualify for a specific reward. As one point usually equals one dollar spent, you’d need to spend a lot of money to be eligible!

Making It Work For You

Credit card reward programs only benefit you if you pay off your balance in full at the end of each month so that you aren’t hit with any interest. This enables you to take advantage of the rewards offered for using your credit card without them being cancelled out or exceeded by the interest. The easiest way to do this is to arrange for a standing order payment to pay off the balance on a monthly basis as this avoids the possibility that you forget to the pay off the balance. To discourage you from doing this, it isn’t uncommon for credit card companies to not have this option on their standing order forms. As many people do not realize that they can add “pay in full” to the form, they usually end up paying a set amount off each month and this ensures that there is always a balance remaining on the card.

What Happens If You Don’t Pay Off Your Balance In Full Each Month?

This is where you can fall foul of the credit card companies, as you can find yourself being charged extortionate interest rates which make the rewards pointless. For example, Bank of America are currently charging between 10 and 20 % interest.

You will often find that the credit cards with the most attractive rewards will be the ones with the highest interest rates, so it is worth thinking twice about signing up for a credit card on the basis of its reward program unless you intend to pay off the full balance each month as you can quickly find yourself in trouble.

Final Thoughts

Unless you are using credit cards on a regular basis and paying off your balance in full every month, credit card reward programs are probably best avoided as the interest rates attached to them can be too astronomical for most people to cope with. However, if you are the type of spender who clears their balance monthly and therefore doesn’t need to bother about interest rates, by all means pick a reward program that best fits your needs and take advantage of the rewards on offer. Just don’t expect to see many rewards unless you’re spending an absolute fortune on your credit card each year!

Related posts:

1. How much is your loyalty worth?
2. AMEX Gold Card Review
3. The Credit Card Newbies Guide (Part 2)
4. Guide: How to Pick the Right Credit Card
5. Rewards Credit Cards: Are They Still Worth It?