Credit Card Rewards

Consumers always like a good deal and they love a good deal that gets better. Credit Card reward programs fit the bill exactly. For most consumers, using a credit card is more of a necessary evil than anything else, but now, with reward programs, the negative can take on a more positive appearance. Or can it?

How Rewards Programs Work for Consumers

When a charge is placed on a consumer’s credit card account, the amount of the charge is added to the balance and a small percentage is calculated to be placed into a reward program. Here are some examples of different programs:

• Consumers receive points based on dollar amounts of purchases which can be redeemed for prizes or even cash.
• Rounded down amounts of purchases are placed on the account with the amount rounded down, credited to the card as a reduction of debt or made available as cash.
• Discounts on balances based on card usage, with a percentage of purchases used to offset charges or interest fees paid on the account.
• Lower interest rates for credit card balance transferred from other credit cards and/or extended repayment terms.
• Insurance coverage for items purchased providing extended warranties or replacement of damaged goods.
• Cash credited to their account balance upon usage of the card

How Rewards Programs Work for Businesses Accepting Credit Cards

The businesses and organizations which accept credit cards for payment on goods or services are impacted by the rewards programs offered by the credit card issuers. Some of the affects of using rewards cards in those institutions are:

• Vendors pay higher fees to the credit card issuer
• Vendors may restrict card usage to certain amounts or types of purchases
• Vendors increase prices or charge extra fee to cover costs for processing credit cards
• Vendors restrict which credit cards can be used in their establishment

How Rewards Programs Work for the Credit Card Companies

The number of companies and variety of credit cards offered are staggering. Credit cards from banks, credit unions, retailers, service companies, and a host of other sources makes navigating the entire ocean of credit cards difficult and confusing. In order to differentiate themselves from their competitors, Credit Card issuers began offering rewards programs to help improve sales. These programs come at a cost and have limits. In response to the added costs of administration, direct cash costs, and vendor fees, most Credit Card providers have increased fees (late fees, over limit fees, etc.) charged to consumers as well as raising rates for individual transactions from vendors. With over $14 billion dollars in fees collected each year, the additional cost of rewards programs are more than covered.

When Does Using a Reward Card Make Sense?

If a consumer making a major purchase makes the purchase using a 5% cash back reward, then it makes sense to get an additional savings, as long as the item is paid off quickly. Otherwise, the financial gain can be quickly eliminated by interest charges. Or if the consumer is using a card which provides for an extended warranty period on a major item and can then pay off the balance quickly, it makes sense. However, if consumers believe their reward card is bringing them additional money or benefits at no extra cost to themselves, they’re wrong.

A World of Credit Limits

When an examination of the fine print surrounding reward card offers is conducted, consumers quickly realize that the rewards come with caveats. Some cards require purchase of specified products or services for the reward amount to be activated. Other cards set limits on the amount which can be included in the 5% refund reward for each month. It is the card holder’s responsibility to understand the parameters of the deal before venturing into the program.

Ain’t No Such Thing as a Free Lunch

Consumers would be well advised to remember the simple adage about something for nothing. The reward programs can have some positive benefits – but only under certain conditions and within specified parameters. In the total scheme of things, the freebies and discounts come at a price to someone somewhere along the line – and it isn’t going to be a price paid by the Credit Card companies. All rewards should be investigated closely before signing up. Remember, it’s all about marketing and getting people to sign up and use the cards.