Credit Card Rewards: An Overview
by Shane Jacobeen
Of all the reasons to use a credit card, rewards are often among the most compelling – who doesn’t want to earn extra cash? But not all rewards cards are created equal – there are many variations and options to choose from. In this article, we will review the most prevalent types of credit card rewards.
Credit card rewards take many forms. Amount the most common are base rewards. These are the rewards that the cardholder earns on nearly every purchase (in some cases, there are spending and/or purchase size limits, but these are fairly uncommon for base rewards). While reward currencies vary (cash back, points, and miles are the most common), the value of base rewards is typically in the range of 1-2 percent of the purchase value.
Some cards offer higher reward rates for specific category rewards. This means that purchases within these categories will earn a higher rate, typically in the 2-5 percent range. Common categories include travel, grocery stores, and dining. Issuers determine how purchases are categorized, so be sure to check their website for the latest information. Spending limits are also somewhat common for category rewards.
Rotating Category Rewards
Most category rewards do not change over time, or at least change rarely. However, an exception is rotating category rewards. Much like category rewards, rotating category rewards apply to specific categories, but with the key difference that the categories themselves change over time, usually quarterly. For example, a rotating reward card may offer 5% cash back on travel purchases from January to March, and then 5% cash back on dining from April to June, and so on. Reward rates for rotating category rewards are typically on the high side of the 2-5% range, but spending limits are also common and activation is usually required each quarter.
Offers and Promotions
Some cards also have retailer-specific offers or promotions. These offers require activation and can be user-specific, but the rewards can be quite high — 10-20 percent is common, but they can be even higher.
Several of the major issuers also have their own shopping portals. Benefits of these portals come in two flavors: extra rewards earned for purchases made through the portal, or a percentage discount when shopping with your rewards balance.
Finally, many cards offer introductory rewards for new cardholders. This can be a reward multiplier or a bonus category for a period of time after account opening. For example, the rewards you earn in the first year may be doubled at the end of the year, or you may earn 5% cash back on purchases at grocery stores in the first 6 months after opening your account.
These aren’t the only rewards that credit cards can offer their customers, but they are the most common. Many cards offer a several of the reward types discussed above. By optimizing their use the use of reward cards, cardholders can accumulate rewards quickly.