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All you need to know about loyalty reward cards

What You Need To Know About Loyalty Reward Cards

by / 0 Comments / Apr 09, 2015

These days you can’t watch TV or listen to the radio without being bombarded with one rewards credit card commercial or another. Loyalty reward cards are big business. Naturally, card issuers are in the business of making money. So, why are they offering consumers money back? To put it simply, these cards lead to more revenue for the banks and other financial institutions that issue them.

  1. Consumers use credit. This is a lucrative market and there is no shortage of customers.
  2. Rewards are an excellent incentive. With so many choices, card issuers must be competitive. As a consumer, when you apply for a credit card, it just makes sense to select one that will reward you when you make your purchases. It’s no accident that the better your credit score, the better the offer. If you have a record of good credit, card issuers want your business. You are a much lower risk and these issuers are eager to make a profit off of your credit card usage. They know you have more choices than consumers with a challenging credit history, so they continually offer new loyalty reward cards to top themselves and their competitors.
  3. You have to spend to earn rewards. Card issuers make money off of their interest rate charges. The more you charge, the more you pay. Your rewards – be they points, miles or cash back – are determined by the amount of money you spend using your card. Rewards often serve to drive you to spend more. This is good business for credit card issuers. Annual percentage rates are always much higher than the percentages they offer you for rewards. Essentially, you have to spend money to make money. Despite your best effort to carry no balances, the result is more frequently the opposite. So, for most credit card issuers, the rewards only serve to offset your APR charges by a minuscule amount.
  4. Co-branded loyalty reward cards generate more revenue for specific companies. They encourage brand loyalty and establish a relationship between merchant and consumer. Department stores, gas stations, airlines, hotels and a plethora of other businesses are increasingly partnering with Visa, MasterCard, and American Express to reap these advantages. Consumers who already shop with a specific merchant can realize better rewards and incentives by using these co-branded cards.

Despite these facts, you CAN come out ahead with loyalty reward cards. To accomplish this however, you must live within your means. Don’t carry a balance. Don’t max out your card. And don’t buy things simply to earn rewards. It’s just that simple.

Earning, Redeeming and Receiving Your Rewards

You earn credit card rewards two main ways:

  • Signing Bonuses

    In a bid to garner your business, most loyalty reward cards now offer a large initial reward when you open a credit card account and spend a specified amount during a finite time-frame. This is in the form of cash back, miles or points. For example a travel rewards card may credit your account 40,000 miles once you purchase $3,000 on their credit card during the first three months that you own the card.

  • Everyday Spending

    You must continue making purchases with your card to continue earning rewards. With cash back cards this translates to a percentage of the dollar amount you spend on purchases. For cards that offer points/miles, you earn a set number of points for each dollar you spend. Most points/miles rewards cards offer a 1:1 ratio at a minimum. They also typically offer multiple points for specific categories. For example, you may earn 3 points/miles for all of your travel purchases and 1 point for all other purchases.

Some cards also offer Anniversary Bonuses. At the anniversary of your account opening, they will credit you with a bonus number of points/miles, or reward you with some type of perk, like a free night at a hotel or complimentary tickets to a sporting event. These cards usually charge an annual fee.

Once you earn your rewards, you want to reap the benefits, right? Some cards set thresholds that you must meet before you can redeem your rewards. For example, you may not be able to use your points/miles until you have accumulated 2,500. However, many cards now allow you to redeem their rewards as soon as you earn them. These cards typically let you offset the cost of your purchases with your rewards when you pay your monthly bill.

This brings us to HOW you redeem your rewards. The following options are typical for rewards redemption.

  • Statement Credit

  • Check

  • Merchandise

  • Gift Cards

  • Charity

  • Special Perks

What You Need to Know About Loyalty Reward Cards

Card issuers are in the business of making money. Rewards are set up to further this goal. You can realize lucrative savings, discounts and freebies with rewards cards with dedication and discipline. Awareness of the traps issuers set to make a profit off of you is the first step. Select the card best suited to your buying needs as the best reward cards are the ones suited for you. Use restraint and only purchase what you can afford. And, finally, never carry a balance, as this will inevitably wipe out the savings you earn with your rewards.

About the Author

Elizabeth Boyd is a financial writer and paralegal. She has written extensively for the financial and credit card market for several years and feels strongly about making consumers aware of their choices and rights.

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