Being paid to spend money may sound like a dream, and with credit card rewards, that dream draws a little closer to reality. When you know how to take full advantage of the reward systems offered by card issuers, you can set yourself up to earn “free money.”
Although you may have prior experience using credit cards, you may be a beginner when it comes to the specific benefits that set them apart, like their rewards programs. In this article, we’ll go over how credit card rewards work, how you can earn rewards relevant to your lifestyle, and how you can build up rewards more quickly.
Types of Credit Card Rewards Programs
From airline miles to hotel rooms to cold, hard cash, credit card rewards programs can provide you with incredible experiences and value in exchange for the dollars you’re already spending.
To paint a clearer picture of what kind of perks you can expect, let’s take a look at the three main categories these programs offer for reward redemption:
- Cashback rewards – By making eligible purchases, you can earn back a certain percentage of the money you spend. Some cards use a flat rate for all purchases while others provide a higher percentage of cash back on specific bonus categories, which may rotate or stay the same. Although the percentages you earn may be small, they add up over time. Eventually, you can redeem cash in the form of statement credits, direct deposits, checks, or gift cards.
- Travel rewards – Do you love jet setting to exciting new locations but don’t love the big price tag that comes with booking expensive flights and lodging? If so, this category may be right up your alley. Travel rewards systems allow you to earn a certain amount of miles per dollar you spend, which you can later redeem when purchasing airline tickets or hotel stays. You can also typically use the “miles” you’ve accumulated to pay for travel upgrades or hotels.
- Points rewards – These incentives build up over time as you make purchases and can be exchanged for discounts or perks. When choosing the right points rewards system, pick a credit card that offers bonus rewards for purchases you already make frequently, such as gasoline, groceries, or even a gym membership. You’ll earn points at a certain rate per dollar you spend depending on your card issuer’s policies.
These are the three most common categories of rewards, but some credit cards offer more unique benefits that may appeal to specific demographics or interests.
Choosing the Right Rewards Credit Card
Before choosing a card, it’s crucial to evaluate your personal spending habits and preferences. Ask yourself these two questions before committing to a card:
- What do I spend the most money on?
- What type of rewards matter most to me?
You’ll want to go with a card that offers bonus rewards for purchases you make frequently.
Just as important, the right card will provide perks that are most meaningful to you, whether those are miles, points, or simply cash back in your pocket.
If you really want to maximize your savings, it’s smart to sign up for a credit card from a credit union. These nonprofit organizations are member-owned and community-oriented, which means you’ll receive top tier customer service and more personalized financial guidance.
Credit unions often offer elevated rewards rates and lower fees that are highly competitive when compared to traditional banks. This is because these institutions are fully dedicated to returning value to their members.
Understanding Credit Card Reward Structures
When and how much you earn rewards will depend on the credit card you choose. Keeping track of which purchase categories will afford you the highest reward returns can help you make the most of your spending.
When starting your credit card rewards journey, you should understand that credit cards come in tiers. The higher tier you own, the more perks you can enjoy. Here’s a general overview of the four main tiers most card holders can expect to encounter:
- Tier 1 – These starter cards are for people without much credit history. They may not provide rewards programs unless you qualify for a specialty card, like a college student card.
- Tier 2 – Tier two typically includes no-annual-fee cards that don’t charge you money to maintain your account each year. These are basic cards that offer simple rewards programs.
- Tier 3 – Rewards programs really start to shine at this level. Large sign-on bonuses are available, plus points you can put towards flights, hotels, and travel upgrades.
- Tier 4 – Premium cards provide premium perks. At this level, you can gain access to luxurious rewards like high-quality hotels, airport lounges, and miles that accumulate quickly.
Within these tiers, you’ll often encounter either flat-rate or rotating reward structures. The former category allows you to earn the same fixed rewards rate no matter what you purchase, while the latter refers to a system where your bonus categories will change every quarter.
Some credit cards have tiered rewards programs in which you earn different rates on different categories of purchases. For instance, you may earn more points on groceries than you do on gasoline.
Between flat-rate, rotating, and tiered rewards programs, there’s a credit card system for all different types of spenders. All you need to do is determine what kind of buyer you are before deciding on which system to use.
Tips for Maximizing Credit Card Rewards
To take full advantage of rewards programs, you need to fully understand the systems and resources your credit card provider has in place. Be sure to research the following policies so you don’t miss out on extra money:
- Receiving sign-up bonuses – You can often enjoy a hefty welcome bonus when you sign up for a new card as long as you meet certain spending requirements within a specific time period.
- Leveraging bonus categories – Credit cards sometimes offer higher rewards rates on specific types of purchases, such as those made at restaurants, fitness clubs, or gas stations.
- Utilizing credit card portals and partners – Completing purchases through your card issuer’s portal or approved partners can sometimes offer you boosted rewards and helpful resources.
- Pay attention to fees. Some credit cards come with annual fees – make sure you weigh the fees against potential rewards earnings.
It’s a good idea to keep track of your rewards so you can stay aware of what you’ve accumulated and spend it before it expires.
Credit Card Rewards Impact on Credit Scores
Some people try to take advantage of different rewards programs by opening multiple credit cards with varying rewards categories. However, you should know that applying for credit may result in a lender performing a hard inquiry check on your credit report: a process which can hurt your credit score if done too frequently.
Another factor to keep in mind is your credit utilization rate: the total amount you owe divided by your credit limit. You need to keep this ratio low by avoiding high credit card balances. To do this, it’s wise to make multiple payments throughout the month or use a variety of payment methods besides just credit cards.
The relationship between credit card rewards and your credit score goes both ways. If you use your card responsibly and improve your credit score, you’re more likely to be accepted for premium credit cards which offer more substantial rewards rates.
Credit Card Reward Redemptions
When it comes to redeeming your rewards, your options will be limited to what your card provider allows. Some of the most popular options include:
- Cash
- Travel perks
- Gift cards
- Merchandise
Within your limitations, you’re free to redeem your rewards however you like. However, it’s important to note that certain rewards do provide more value than others. As a rule of thumb, you should try to use your reward redemption for purchases where you can receive at least a 1:1 value (1 cent per point/mile).
Start Earning Credit Card Rewards
There’s no better feeling than earning rewards just for spending money on purchases you’re making anyway. When you utilize these programs wisely and responsibly, you can enjoy incredible perks in the form of travel accommodations, savings, and even cash.
To take full advantage of your credit card and reap the rewards you deserve, explore credit unions in your area with CUSelect. We’ve helped countless individuals identify a branch that supports their financial journey.
