A credit card is a credit card is a credit card — until you take all those snazzy rewards into account. Rewards programs are more popular than ever, and credit card companies use them to differentiate their offerings. If you’ve seen a credit card commercial on television lately, they’re not talking about payoff plans or post-introductory interest rates; they’re painting dreamy pictures of free vacations and big fat checks.
Unfortunately, you aren’t a charity and credit card companies aren’t generous donors. That’s why a lot of these rewards come with a whole tangle of strings attached. Credit card companies are, after all, businesses, and they want to make money. Credit card rewards programs are designed to entice you to spend more money. They bank on the fact that you’ll be lured by the rewards but tripped up by the restrictions and fine print. The result? Those rewards won’t be of much value for you, and the credit card company will be taking your mistake to the bank.
There’s good news, however: you can beat the system and capitalize on credit card rewards. We’ll show you how.
Reportedly, 85% of U.S. households participate in at least one rewards program. With all the different rewards programs out there, it’s important to understand the big picture as well as the fine print. Rewards programs typically fall into a few primary categories. Let’s talk a bit more about those.
How credit card rewards work
- Many credit cards assign a certain number of points for dollars spent. It’s often a 1:1 ratio, with some cards offering extra points in certain categories. Points can be redeemed for specific rewards including cash, dining, and travel. The primary issue with points systems? They’re inherently complex because you’re not dealing with dollar amounts. Transparency is often lacking, and point conversions can be convoluted and downright tricky.
- Cash back
- Everybody likes cash, right? That’s why cashback rewards programs are so common — and so popular. Each program has its own specifications and restrictions, but the gist is that you receive a certain percentage (typically between 1 and 6 percent) of cashback on your purchases in a specific category throughout the year. Annual limits mean that even those seemingly high percentage-point rewards may not add up to as much as they first appear. And beware: often, these rewards categories include major restrictions, and they even rotate. Talk about confusing! Common cash back categories include:
- Redeeming points for merchandise/gift cards
- Gift cards are a convenient, highly functional option. Bonus: sometimes credit card companies partner with retailers to provide additional discounts on top of gift cards, resulting in extra savings.
- With some credit card programs, you can redeem your rewards for discounts on certain products and services.
You’ll lose your rewards if…
Easy come, easy go. Those rewards you worked (er, spent) so hard to earn aren’t necessarily yours forever. There are a number of ways in which you can inadvertently forfeit your rewards. Possible scenarios include:
- Late payments
- Late payments can result in more than just fees and higher interest rates. If you miss a payment, many credit card companies will take back your rewards before you can say “oops”. American Express is one of them: members who pay late in a month forfeit their rewards for that month.
- Allowing rewards to expire
- You might want to stop saving those points for a rainy day. Check expiration dates, because not all rewards last forever. Being forced to use up rewards when you’re not ready takes a lot of the value — and fun — out of rewards programs.
- Not spending the minimums
- You may have to spend big to get big rewards. Many programs have minimum monthly or annual amounts that need to flow through a credit card in order to “unlock” rewards. Fall below that amount, and you can become ineligible for rewards and even lose previously earned rewards. Keep in mind that if you have to make a big purchase to stay above the minimums, your rewards can suddenly become very expensive.
- Failing to read the fine print
- Does each dollar spent equal one point? Or two? Is your favorite grocery store included in the cashback program? It’s up to you to go beyond the marketing language to read the fine print. This doesn’t just apply to the fine print on the application; your credit card issuer will provide regular statements that can include crucial information about updates.
- The card issuer suddenly changes its terms
- That fine print you are supposed to read? It is likely to include disclaimers, such as the card issuer reserving the right to change terms and conditions as they see fit. If you’ve been hoarding points and your terms change, you may sacrifice that stash — and there’ll be nothing you can do about it.
How to maximize the potential of credit card rewards programs
We promised that you can play smart and beat the system. Credit card rewards can provide major value when used responsibly and wisely. We’ve compiled a number of tips and tricks to help you stay ahead of the game.
- Don’t bust your budget.
- The promise of enticing rewards can easily spur consumers to stretch their budgets. It’s easier to “rationalize” that shiny new gadget if you imagine the shiny new reward that could accompany it. Don’t fall into this trap.
- Pay off your balance each month to avoid late fees and interest rates.
- Those credit cards aren’t so rewarding if you are also paying high interest rates and late fees in order to maintain your credit card. You already know that late fees can also negate your rewards, leaving you with no rewards and a hefty bill.
- Pick rewards that match your lifestyle.
- A 10% discount on a golf superstore won’t do much good if you’ve never picked up a golf club. Thoroughly research the available rewards — and examine your own spending habits and brand/retailer/vendor preferences. Then select a program that aligns with your lifestyle and goals.
- Pay attention to categories.
- Some credit card companies allow you to select which categories for which you want to earn bonus rewards points. If you’re a big grocery spender, you’ll want to concentrate rewards in that category. If you drive a gas guzzler, swing benefits toward the pump. And if categories rotate, pay attention. Mark it on your own calendar. Spend wisely.
- Play the field.
- Who says you have to be loyal to one card? If you have a strong credit score, you should consider applying for multiple cards that offer point sign-up bonuses. Then you can spend the minimum amount on each card to earn the bonus. Just make sure you keep track of spending and pay off that balance each month!
- Watch for sales.
- Believe it or not, even credit card rewards programs offer sales and special offers. Sure, they’re also designed to entice more spending, but if you select wisely, you can nab extra perks with limited extra obligation.
- Be aware of limits.
- You may earn 6% back on groceries, which sounds fantastic. But if it’s just on the first $6,000 of groceries spent in a year, you can’t possibly earn more than $360 back. Now, that’s certainly nothing to sniff at, but it may not be what you’d hoped for, either. Know the limits.
- Comparison shop — and negotiate
- Credit card companies compete to win your business. You don’t have to go with the first offer you receive in the mail. (In fact, you almost certainly shouldn’t.) Do some research. Compare offers. Talk to sales representatives and see if there are any special concessions you can secure up front.
- Treat your card like cash — and use it for everything.
- One of the best ways to rack up rewards is to make plastic your spending method of choice. Retailers and restaurants are increasingly receptive to credit cards, and you can use them for everything from health care payments to utility payments to coffee. Just pretend that you’re spending cash, which means always paying off the full balance. Using a credit card for everything is also a good way to track your spending, because there’s always an electronic record of it. As always, only spend if you have the money. Don’t rack up debt just to earn rewards.
- Pay for major, obligatory purchases with a credit card.
- You might even be able to make mortgage, rent, or utility payments on a credit card. Beware: some vendors charge fees for charging on a credit card, so make sure this strategy will earn extra value instead of cost extra money.
The final word
There are three key facts to remember about credit card rewards programs:. First, credit card rewards programs are designed to earn money — for the credit card company; creating value for you takes some strategy. Second, always take time to read the fine print; do your homework and know what you’re getting yourself into. Finally, always make payments on time; failure to do so will hit your rewards stash and your wallet.
Play the game right, and you can beat the credit card companies at their own game.