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Credit cards with rewards are basically a loyalty program for the bank or associated partners such as an airline. You” earn the most rewards if you use your rewards card as your everyday credit card for as many transactions as possible.

Reward credit cards are packaged in several types, each one offering rewards programs calibrated to suit particular spending patterns. But they all have the same basic premise: the more purchases you charge to the reward credit cards the greater the rewards.

Understanding the different reward card varieties

Frequent flyer credit card. Points earned from a frequent flyer credit card normally go to the frequent flyer program of the airline you prefer. The number of points earned depends on how much spending is charged to the card. Frequent flyer cards and points not only offer flights but can be used with travel partners such as major hotel chains, car rental and more.

Credit Cards with General / Catalogue Rewards. The credit card usually has partners in the program who provide the products offered for redemption under the rewards program. The items on offer could be anything although may include small applicances luggae, movie tickets, gift vouchers and more.

Credit cards with Cash-back. These are among the most simple credit card rewards program and have a clear value such as one percent of what you spend. As an example the card may offer a rebate from participating gas stations.

Instant reward credit cards. These cards offer even simpler programs. There are no points to accumulate; you will simply receive an instant reward from participating merchants. The offer could be a discount, rebate or a bonus with items such as mobile phones.

Getting value from reward credit cards

Your credit card should fit your spending behaviour. If you use charge often and prefer not to carry any balances, reward credit cards that allow you to accumulate points should work best for you.

If you don’t pay your cad bills in full each month then it’s more than likely you won’t be suited to a points based rewards credit card. Reward credit cards usually have higher interest rates; the card companies recover the cost of running the rewards program partly from higher interest charges. Unpaid balances carried into the next payment period will attract the high interest rate. The cost of the high interest charges is likely to far exceed the value of any rewards earnt.

Reward credit cards usually impose a membership fee. To know if a rewards program is write for you you need to do a rough calculation on whether the benefits will outweigh any costs such as annual fees and interest.

The simplest way to measure this is to work out how much you would have to spend per $1 of rewards. One card may award you 1 point per $1 spend, whilst another gives 1.5 points per $1. To get a reward item worth 6,000 points you thus need to spend $6,000 on the first card and only $4,000 on the other.

Another method is the point currency concept developed by Cannex. Knowing the point currency lets you work out the spending value of the points you earn. You simply divide the required number of points to redeem a reward item by its suggested retail price. The lower the number of points required the higher the points value are as you need less points for the same reward.

For example, one program may require 10,000 points to win an item worth $75 in retail, but another program may need 12,000 points. The point currency in the first program is 10,000 divided by $75 or 133.3 points per $1 for the first, and 12,000 points divided by $75 or 160 points per $1 for the other.

As far as the rewards item is concerned, the first program gives you better point currency. Note though that if you incorporate the first method and the example described above, you may need to spend $10,000 to accumulate the required points in one program (at 1 point earned per $1 spent) but only $8,000 in the other (at 1.5 points earned per $1 spent).

Your spending pattern and the offers from credit cards can change over time - try to keep tabs on whether you are still benefitting from a credit card scheme.

Article by Richard Greenwood of the Click 4 Group.

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