Since credit cards are becoming more and more popular in the U.S., it's not surprising that credit card companies and banks keep coming out with all kinds of cards, like rewards credit cards, cash back credit cards, and credit cards with 0% APR. They do this to try to attract as many potential cardholders as possible by giving them lots of different reasons to use their cards. The biggest problem with this plan, though, is that it's not always clear how credit card rewards work in each programme. For example, what's the difference between cash-back credit cards and rewards credit cards? And which card will save you more money in the long run? Some potential cardholders don't know how much their "points" are worth on the market because there are so many different rewards programmes.
There are two main types of credit card rewards programmes on the market today: those based on a percentage and those based on points. The first type gives you a percentage of your money back when you buy things in certain categories, like gas, travel, and sometimes even entertainment. The second one gives you "points" for every purchase you make, which you can later use to get money back on different costs, most often travel. When it comes to "points," it can be hard to figure out exactly what you're getting for your purchases when you use a points-based rewards credit card. Percentage-based rewards plans are usually easy to understand, with a few exceptions like how you get your cash back and how much you can earn in a given year.
But at the end of the day, it all comes down to the math formula used to figure out the rewards. A good credit card with percentage-based rewards will give you anywhere from 3% to 5% back on certain purchases (again, commonly gas and travel.) At a 5 percent rate, you'll get $50 back in rewards if you spend $1,000 on gas in a given year, which, with current gas prices, isn't all that much. $50 isn't a lot of money for a year's worth of gas, but it will fill up your tank twice and is better than nothing.
Compare this to systems based on "points." Chase's Free Cash Rewards Visa has a points system that lets you get 2,500 points for $25. For every dollar you spend, you get one point. Only 1% of the money you put into the card will come back to you. Some airline credit cards offer a slightly better deal, like American Express's Blue Sky, which lets you redeem points (again, at a rate of one dollar per point) in increments of 7,500 for a $100 refund on travel expenses. This works out to a rate of return of about 1.3 percent. Again, even a small rate of return can help pay for some of your costs and make some purchases almost free. But 1,3% versus 5% — well, you can do the math.
Points systems and percentage rewards credit cards are about the same for non-targeted purchases, since most percentage reward cards give you 1% back on most non-targeted purchases. And the "points" cards can give you some perks that a percentage-based rewards card can't, like 1,000 to 15,000 bonus points when you sign up (depending on the value of a given points system, of course.) But if you buy gas, travel, and entertainment often (and who doesn't? ), you have a slight advantage with percentage-based rewards programmes.
Check the fine print and think about what you want to buy, but remember one of the first rules of finance: when it comes to credit card rewards, you should always look at the long term and do the math.
