Complete Beginner’s Guide to Reward Credit Cards: Everything You Need to Know

Reward Credit Cards Guide

For anyone who uses credit cards on day-to-day purchases, rewards cards are a good opportunity to earn back cash rewards every month. Over half a trillion pounds a year are spent on credit cards alone, yet the overwhelming majority of these are not rewards cards. This means that the bulk of credit card holders are missing out on potentially earning hundreds of pounds in rewards each year by not using rewards credit cards to make purchases. This article will explain what rewards cards are, how they are different from other credit cards, and whether they may be a good option for you.

How Do Reward Credit Cards Work?

Rewards cards have a fairly straightforward process. Every time you use your credit to make a qualifying purchase, your credit card provider will give you a reward. These rewards vary based on the kind of credit card you have, but every rewards card is based on this core structure. This increases the benefits of your purchases and can even expand your buying power.

As with any kind of financial incentive, however, there are terms and conditions. Credit card companies use rewards cards to incentivise buyers to sign up for cards and use them to make purchases. If the card’s balance is not paid back in full every month, the cardholder will receive no rewards and end up paying interest on the debt. This gives credit card companies a prime opportunity to make additional profits off cardholders, given that most people will not be able to pay back the entirety of their credit card balance on a monthly basis.

Who Should Get a Rewards Card?

You should only consider signing up for a rewards card if you are fairly certain that you can pay off the balance every month. If this will prove a challenge, there are other kinds of credit cards you can consider that will probably be more beneficial. Additionally, using rewards cards for major purchases is not a prudent idea.

You may also decide to pass on a rewards card if you find you are not interested in the rewards offered. For example, you may prefer a cash-back card, which will allow you far more freedom in choosing how to spend the “cashback” you receive for your purchases. Similarly, if you are already making payments on another credit card, it may not be the right time to open a rewards card, as failing to make regular payments can mean accruing interest fees and more debt.

Many rewards card providers are highly selective in the applicants they approve, which is another factor to bear in mind. Rewards cards can potentially be a major source of lost profit to credit card companies if they are used effectively, so providers tend to be restrictive in issuing them.

Every credit lender will have its own terms and conditions as well as unique criteria for approval, so it is probably in your best interest to pick a selection of rewards cards that appeal to you and then find out if you have a chance of being approved for one. There are also online tools that can help you do this by checking your credit history for free. As with any financial account, your credit score will be a crucial factor in your approval or denial by a credit card company. Take care to not apply for a credit card without prior review, as a rejection can actually damage your credit score in some instances.

Is a Reward Card Worth It for Me?

Rewards cards can be highly beneficial if you know how to use them correctly, assuming you are interested in the rewards they offer. So long as you make sure not to borrow more than you can fully pay off in a single month, you can use a rewards card to increase the benefit of your purchases.

Keeping that in mind, rewards cards are not a good idea for those seeking to borrow money for larger purchases. For these, a 0 per cent purchase card will probably be a better fit. This is because the interest gained on a rewards card can quickly outpace any potential rewards you might have earned.

Using rewards cards effectively typically involves changing your spending habits.

For example, if you usually use a cash or debit card for certain purchases that would qualify for rewards, you will have to use your rewards card to get them and pay the card down later. For some cards to be worth the investment, you might have to start using them for most or even all your common purchases. If you are uncomfortable with switching to a credit card for specific purchases like this, it may be difficult for you to use a rewards card in a way that benefits you rather than your credit card company.

If you already have a significant amount of debt or are worried about accruing more, a rewards card may not be the best option for you. Lastly, as with any credit card, do not look on a rewards card as an excuse to spend more than you normally would. Rewards cards can quickly become dangerous if they are viewed as an opportunity to overspend rather than as a way to earn rewards on purchases you would have made anyway.

A rewards card can also come with significant fees that you should be aware of before signing on for one. There may be an annual or even a monthly fee for a specific card, and this can affect how worthwhile the long-term rewards will be for you. Like interest, fees can completely negate your rewards if you do not use your card frequently enough.

What Kinds of Rewards Cards Are Offered?

The most common type of rewards card works by allotting you a certain number of points for different kinds of qualifying purchases. These points can then be traded in for specific rewards offered by your credit card company. This often involves discounts or goods from various retailers, which means that you should not have your heart set on a specific reward from a particular company but rather be interested in using rewards points across a variety of stores and services. If you do not follow your credit card plan closely, you may not be able to take as much advantage of your rewards as you expect. Rewards plans are frequently written in vague or misleading terms, making them more difficult to use, so close examination and possibly even some trial and error are key.

Each rewards card will give you a different number of points for the money you spend, so be sure to look at the details of various rewards programs before agreeing to them.

This will allow you to tailor your shopping habits to your rewards points, giving you the most value for using your card.

If you are intent on shopping at specific outlets, many of these offer their own particular rewards cards that you can apply for. These cards work like any other credit card for any qualifying purchases wherever you decide to shop, but their rewards points will only be applicable at the retailer who issued them to you. While this obviously limits the locations where you can use your rewards points, it also means that you will probably get more value than you would from spreading rewards across different retailers. Some companies have partnerships with other business that can create exceptions to this rule, so this is another thing to bear in mind.

Air Miles Cards

Air miles cards, sometimes called frequent flier cards, give rewards points in exchange for purchases.

Air Miles Credit Cards

However, these points can only be used to purchase airline tickets. As their name implies, these cards can be highly beneficial for frequent fliers who know how to take advantage of them. On the other hand, many airlines can be extremely particular about which flights qualify for air miles points. Most air miles rewards points cannot be used on any given flight but only on predetermined flights, and these might be few and far between. Often, airlines restrict cardholders from using their points on tickets the company has been unable to sell. Sometimes, this can lead to absurdities like departing and returning flights being weeks or even months apart. Because of this, frequent flier cards necessitate carefully considering flight options in order for them to be cost-effective.

How Do Cash Back Rewards Cards Differ from Other Cards?

Cashback rewards cards are probably the most popular type of rewards card because, as the name implies, the reward for purchases is cash money. Essentially, this translates to a kind of discount on every qualifying purchase, incentivising cardholders to use the card for more purchases. Again, like other rewards cards, it is important to bear in mind that for rewards cards to be effective, you must pay them off in full every month. Additionally, while many credit card providers now give cashback rewards on their credit cards for every purchase, this is not the case for all providers. Be sure to check the terms of a particular credit card company to find out whether it limits cashback to specific purchases, such as bills.

Cashback Credit Cards

Cashback cards offer a small percentage of your purchase back. If you spend 100 pounds on a one per cent cashback card, therefore, you will receive one pound back as a reward. Depending on the specific card company and plan you have, you could be paid back every months or once a year. Most companies pay annually, but it all depends on your provider’s policy. Different cards have various ways of allotting the cashback, either by depositing it into a bank account to be spent at your leisure, turning it into points, or simply removing the amount from your credit card bill as a discount.

Some cashback card plans work in tiers that reward you a higher percentage the more money you spend. This incentivises cardholders to use their cards more often than they otherwise might. Be careful that you do not spend beyond what you can repay each month, however, as this will negate any possible rewards with compounding interest. Other cards will offer varying percentages of rewards depending on the retailers where you make purchases or how much you spend.

What Is the Bottom Line?

The key factor to bear in mind with rewards cards, as with all credit cards, is that you need to know when and how to use them strategically for them to benefit you. Rewards cards have their own unique terms and conditions which are quite different from other kinds of credit cards. These characteristics should guide your purchases and financial planning. Without careful attention to these details, rewards cards can end up costing you more than you would have earned in rewards and end up increasing your debt.

Be certain to keep track of any monthly or annual fees you may be required to pay and check to make sure that these will not impact your rewards too significantly. Most importantly, make it your primary goal to pay back the sum of your credit card purchases in full each month to avoid interest fees.

There are several drawbacks to opening a rewards credit card, and many people find that these are more significant than the advantages. However, choosing the right card from a solid credit card provider can help you reap significant financial benefits. You simply need to be familiar with your provider’s terms and conditions for qualifying purchases and know how to practically apply them to where and how you use your rewards card. With the right financial planning, you may find that you earn back several hundred pounds over the course of the year. If you are confident in your ability to make prudent purchases and pay your bill on time, a rewards card may be a worthwhile investment.

Oliver Dale is Editor-in-Chief of MoneyCheck and founder of Kooc Media Ltd, A UK-Based Online Publishing company. A Technology Entrepreneur with over 15 years of professional experience in Investing and UK Business. He built Money Check to bring the highest level of education about personal finance to the general public with clear and unbiased reporting.


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