Credit card advice: Be on the lookout for rewards systems

How do credit card rewards programs work?

How do credit card rewards programs work?

There are three main benefits to obtaining credit cards:

  1. You gain access to the cash you need.
  2. Using them lets you build up history for your consumer credit report, increasing your chances of getting approved for future loans.
  3. You can take advantage of some pretty cool rewards systems.

If you're reading this, you've probably realized how complicated rewards systems can be. You might already rack up rewards with your credit card, but don't know how to take advantage of them. Here's how. 

How do cash-back rewards work? 

You're not going to like the answer: It depends. For instance, Discover and Capital One both offer cash-back programs, but how you actually earn cash back differs between each program. 

In general, cash-back rewards reimburse you for a small percentage of the credit you spend to buy something. Suppose you use your credit card to buy a $50 pair of shoes. Your credit card offers 1.5 percent cash back on every purchase. That means you'll receive $0.75 back from the credit card company.

This may not sound like a lot, but think of it this way: If you spend $250 each month on two transactions (so, you spend $125 twice a month with your credit card), that means you'll receive almost $45 at the end of the year. FYI – credit card companies usually send cash-back checks to their customers on an annual basis. 

How can you earn cash back on credit cards? How can you earn cash back on credit cards?

Terms and conditions 

Again, while cash back rewards usually follow the same structure, the terms and conditions vary depending on your credit card provider. For example, Discover offers 5 percent cash back up to a quarterly maximum on different categories. By "quarterly maximum," the company's referring to largest amount of money on which you could earn cash back over a three-month period (in business, the year is broken up into quarters). "Categories" refer to types of purchases like groceries, gas and other monthly expenses. 

So, if you have a credit card that resembles Discover's structure, you may be able to receive 5 percent cash back on on the first $2,000 you spend between January and March, but if you spend $3,000 over that time period, you won't earn 5 percent back on that addition $1,000. 

Discover's approach isn't the only one. Capital One, for example, offers unlimited cash back of 1.5 percent. Whichever you think is better depends on your opinion and spending habits. 

How do travel rewards work?

Travel rewards allow you to earn "mileage" every time you use your credit card.

If you check out a credit card provider's travel rewards system, you'll notice right away that they're much more complicated than cash back programs. If you have a hard time wrapping your head around it, don't hesitate to call the provider and ask some questions. Overall, you may want to hold off on getting a travel rewards card if you don't fly often.