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

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