| With the increasing popularity of credit cards in America, it's no surprise that credit card companies and banks continue to flood the market with all manner of cards--rewards credit cards, cash back credit cards, 0% APR credit cards--all in an effort to |
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With the increasing popularity of credit cards in America, it's no
surprise that credit card companies and banks continue to flood the
market with all manner of cards--rewards credit cards, cash back credit
cards, 0% APR credit cards--all in an effort to appeal to as many
potential cardholders as possible by offering a wide variety of
incentives for use. The major problem with the strategy, however, is
that there's often little explanation of exactly how credit card
rewards work in their respective programs: what's the difference, for
example, between cash back cards and rewards credit cards? And which
card will, in the end, save you more? The variety and sheer number of
rewards programs leaves some potential cardholders confused about the
actual market value of their "points" values.
The most prevalent credit card rewards plans out there today fall
into two different categories -- percentage-based rewards and
points-based systems. The former offers a percentage of your money back
on purchases in certain targeted categories, most commonly gas, travel,
and in some cases entertainment. The latter offers a series of "points"
for all purchases made, which can eventually be redeemed for
reimbursements on various expenses, most commonly travel. The
percentage rewards plans are fairly straightforward (except for a few
obscure snags, such as how your cash actually gets back to you and how
much you can earn in any given year through credit card rewards), but
in the case of "points", it's often difficult to determine exactly what
you're getting for your purchases using a points-based rewards credit
card.
But in the end, it all comes down to the numbers, specifically the
math formula used to calculate the rewards. A good percentage-based
rewards credit card will offer anywhere from 3-5% back on targeted
purchases (again, commonly gas and travel.) If you spend $1,000 at the
pump in a given year (which, with current gas prices, is a pretty low
amount to spend on gas in a year), you'll earn $50 back in rewards at a
5% rate. For a year's worth of gas purchases, $50 isn't a huge amount
of money, but it'll fill you up twice and it's certainly better than
nothing.
Compare this to "points" systems. One points system (from Chase's
Free Cash Rewards Visa) offers a rewards rate of 2,500 points for $25,
with one point earned for every dollar of purchases. That's only a 1%
rate of return on the money you put into the card. Certain airline
credit cards offer a slightly better deal, such as American Express's
Blue Sky, which allows you to redeem points (again, one dollar per
point) in 7,500 increments for a $100 reimbursement on travel expenses,
meaning about a 1.3% rate of return. Again, even a low rate of return
can help to offset any expenses you may incur, and can make certain
purchases essentially free. But 1.3% versus 5% -- you do the math.
On non-targeted purchases, points systems and percentage rewards
credit cards even out, since most percentage reward cards offer a 1%
rate of return on the majority of non-targeted purchases you make. And
the "points" cards can offer a few incentives that a percentage rewards
credit card can't, such as bonus points on sign-up, anywhere from 1,000
to 15,000 and up (depending on the value of a given points system, of
course.) But, assuming that you frequently purchase the targeted items
on a percentage rewards credit card (and who doesn't make frequent gas,
travel, and entertainment purchases?), you've got a slight edge with
percentage-based rewards programs.
Check all of the fine print and consider your specific purchasing
needs, of course, but remember one of the first rules of finance: when
dealing with credit card rewards, always look at the long term and make
sure to do the math.
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