A Beginner’s Guide: How Do Credit Card Rewards Really Work?

Credit card points are one of the three main types of credit card rewards, along with cashback and miles. Many credit card companies these days offer rewards as an incentive for people to pick their card over another company’s card.

How do credit card rewards work?

Some might wonder where this “free” money comes from. The money for customer rewards is paid for by the customers and merchants themselves. The short answer is that rewards are funded by fees and interest paid by the customer and by merchant fees that are included in prices. The latter part of this, called “interchange” might not be as familiar a term as “interest” or “fees” to some people. This is because “interchange” is basically invisible. When you use a credit card at a business, the merchant has to pay a fee to accept the payment. A percentage of this fee (usually 1%-3%) goes to the card company along with a flat fee. These fees that go to the card company are interchanges. 

Rewards are thus related to interchange because both are a percentage of the purchase. Some card companies take in a similar percentage in an interchange that they are also given as rewards. Other times, the interchange doesn’t measure up to the cost of the rewards. This is why some companies only reward you if you spend more than a certain amount, but less than another amount. Other card companies are willing to take the loss that the difference between the interchange and the rewards creates. Oftentimes, they can attract enough customers to offset the cost because their customer pays enough interest in the long-term. 

Now that we know how rewards are funded, it’s time to take a look into making the most of your credit card rewards. Here are some steps to take when considering the rewards credit card companies offer. 

1. Research the right card for you

Everyone has different needs and different types of lifestyles depending on their financial footing. You should research a card with a rewards program that best aligns with how you spend your money. For instance, if you tend to travel a lot, you could benefit from a travel card with points that help to pay for flights and hotels. If you have a family, on the other hand, cards such as American Express can help you earn cash-back at stores you go to a lot such as the supermarket. 

2. Use your card as much as you can and make payments on time

If you charge almost if not all of your purchases to your credit card, you can get the most out of the card. Many reward cards offer points, miles, or cash-back on every dollar spent. Thus, the more you spend, the more rewards you are eligible for. It is also important to remember to pay off you credit card bill on-time every month as interest incurred will dramatically decrease the rewards. 

3. Use many cards

Using multiple credit cards can help you get the most rewards. You might consider having one card you use on a daily basis with another one dispersed between. Another great option could be getting a credit card through a store you frequent a lot as it could help you save a lot of money. 

4. Discover everything the card could do for you

Cards often have hidden perks that many consumers don’t know about. For example, if you have a Delta SkyMiles Platinum American Express Card, you can save 20% on meals and entertainment during your flight. There are usually different tiers within different networks. 

Resources

https://www.nerdwallet.com/article/credit-cards/where-does-money-for-credit-card-rewards-come-from

https://www.nerdwallet.com/article/credit-cards/make-most-rewards-credit-cards

The Best Student Credit Cards

Getting a credit card as a student can be difficult. Banks don’t want to give credit to people that aren’t able to pay it back. That’s why the student credit card was created. These cards typically have smaller limits, rewards, and are a way for students to build credit for the future. As long as you pay on time, you can build a credit score--something essential for getting a loan or mortgage down the road. 

The Credit Card Act of 2009, however, made it so that one can’t be issued a credit card under 21 unless a parent and/or guardian cosign or the student has their own income. Here is a list of some of the student card options.

The Bank of America Travel Rewards Credit Card (for students)

With this card, you can earn 1.5x the points for every $1 spent on purchases. These points don’t expire, and as a bonus for signing up, you automatically get 25,000 points. In addition, there is no transaction fee. However, there are no bonuses to increase rewards, high balance transfer fees, or high penalty APR and late fees. There is even no introduction APR offer on balance transfers. 

The Discover it Student Cash Back Card

With this card, you can earn 5% cashback on rotating bonus categories. This includes a $20 statement credit each school year, one's GPA is higher than 3.0, and a first-year cashback match. There are some cons such as a low 1% base reward rate, that one’s bonus categories must be activated quarterly, and that 5% cashback is limited to $1500 spending per quarter.

Bank of America Cash Reward Credit Card for Students

With this card, you earn a welcome bonus, competitive cashback reward rates, a free FICo score, and a 0% intro APR offer with a generous term. However, you can get a high penalty APR and late fee, 3% foreign transaction fee, and high standard APR depending on your credit. 

Discover it Student Chrome

With this card, you can double your rewards with a cashback match after the first year and get bonus rewards categories. It is also easy to get approved. However, some rewards categories have earning limits and many places outside of the United States do not accept Discover. 

Chase Freedom Student Credit Card

With this card, there is no annual fee, a free credit score, a $20 reward every year for five years if you’re in good standing, and a 1% cashback on all purchases. There is also a credit limit increase after making five payments on time and a $50 welcome bonus if you make your first purchase within three months. Some cons, however, are that there is no 0% APR promotion for balance transfers or purchases and no bonus categories on spending. 

Deserve EDU Mastercard for Students

With this card, there are no foreign transaction fees, no social security number required, and no cosigner or deposit required. There is also a free one-year Amazon Prime Student membership. Some cons, however, are that there are high regular APRs, you must have a US bank account with a certain balance, and there are no balance transfers of cash advances. 

Resources 

https://www.forbes.com/advisor/credit-cards/best/student/

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