Rewards Credit Cards
Rewards credit cards work on the principle of compensating a user’s purchases by providing rewards in various forms. By awarding attractive rewards, credit card companies can incentivize you to use their cards over other brands. Most card rewards come in three forms: cash back, miles, or points.
Cash Back Rewards
Cash rewards give you the opportunity to redeem your rewards in the form of cash usually in the form of a statement credit or through a platform partner -- like Amazon. Depending on the partners your credit card company has, you may also be able to redeem these rewards via gift cards etc, whereas others may be more restrictive in their redemption policies. Cash back, like most rewards, is earned upon making a purchase made with your credit card.
The points system works similarly to the cash rewards and is dependent upon how much you spend. Instead of receiving cash as compensation for your purchases, you will receive a certain number of points, dependent on your purchases, that you can redeem for certain goods or services. Typically, points rewards are specific to a particular type of reward -- like travel. The tradeoff is you may earn a higher rewards rate for a particular kind of purchase but may not earn points for general purchases.
In many cases, a points system may be more advantageous since many goods are cheaper through point redemption than via cash redemption. This is more rewarding but often comes at the cost of less optionality. Ideally, you would want to open a card through which you can maintain a point to reward ratio of 1 to 1 (or greater), i.e 1 mile is equivalent to 1 cent or penny.
Travel rewards offer you travel miles in exchange for your travel purchases, which can be used for various purchases, such as hotels and flight updates.
These rewards are often split into two categories, tiered and flat rewards. Flat rewards offer the same fixed rewards regardless of what you purchase. On the other hand, tiered rewards offer different rewards rates depending on the purchase category. Within tiered rewards, the categories with higher reward rates may also change from time to time.
Apart from the type of rewards cards, it is also crucial to understand how to best maximize the effectiveness of your rewards. For instance, you should look out for rewards cards that offer the biggest bonuses, many of which come in the form of a sign up bonus. Many sign up bonuses can only be redeemed after you have spent a certain amount of money with the card; therefore, it is important to look at how much you usually spend per month. If you don’t want to take the time to perform the manual analysis yourself, you can sign up for a free Clyde account. Clyde’s AI calculates the rewards value for each card you will likely earn in the first year after card opening. Determining if you’re likely to receive your welcome bonus is one of the factors the AI considers when calculating your rewards value.
When evaluating which new card to apply for, look into if your rewards expire. Some cards will offer rewards that are valid as long as you keep the account open, while others have offers that are valid for a limited period of time only. Similarly, it is also important to understand cash back caps for cash rewards cards. Some cash rewards cards impose caps/restrictions on the rewards you can earn. For example, your rewards rate on a particular category can be higher until you spend a certain amount, after which it declines.
Rewards vs Fees
Rewards also need to be something that financially makes sense for you in the long run. Even if a card you offer has a good rewards rate it is vital to calculate whether these rewards are greater than the annual fee and other fees involved with the card. If you want these calculations done for you, sign up for a free Clyde account. You will see the annual rewards value, less fees, you are likely to earn after the first year of card opening. You can compare cards quantitatively by their value to ensure you get the best card for how you spend.
Planning ahead of time will also help increase the effectiveness of your rewards card. If you are looking for your first card you should consider a rewards card for Limited / No credit. If you have credit history, typically the highest rewarding cards are available to individuals with Good or Excellent credit.