Are you skeptical when it comes to rewards credit cards? Many people wonder how these credit cards can save you money, and fear that these products will instead cost them in the end. In fact, rewards credit cards are not for everyone, but they do offer significant potential savings for many cardholders.
How Rewards Credit Cards Work
Rewards credit cards offer consumers a return on their spending in the form of rewards points, airline miles, or cash back. The typical rewards card will offer rewards worth 1 to 2 percent of your spending, and sometimes higher rates of return for purchases from a specific retailer or category of merchants. Credit card issuers are able to offer these rewards due to the fact that they receive revenue from merchant fees on every transaction. And when other income, such as annual fees, late fees and interest charges, are considered, the credit card industry is able to make a profit, despite the fact that it can offer its cardholders valuable rewards for their spending.
How a Rewards Credit Card Can Save You Money
The easiest way to save money with a rewards credit card is to use a simple cash back card. For example, Citi's Double Cash card offers a total of 2 percent cash back on all purchases, with no limits. This means that cardholders will receive an automatic discount on all of their spending. A household that charges $1,500 each month will save $360 per year, for example.
Also, it's possible to receive valuable travel rewards in the form of airline miles or hotel points from cards co-branded with travel providers. Often, travel rewards credit card users will use these points and miles to go on a vacation that they would not have otherwise taken. When travelers are able to redeem their rewards for a flight or hotel they would have paid for, they are saving money. In addition, many airline credit cards will offer baggage fee waivers and discounts on in-flight purchases of food, beverages, and entertainment, which can also help to save them money.
Drawbacks of Rewards Credit Cards
While you can save money by using a rewards credit card, it doesn't mean that you always will. Those who avoid interest charges by paying their statement balances in full will usually save money by using a rewards card, but those who carry a balance probably won't. This is because a rewards credit card will have a higher interest rate than a similar card that does not offer rewards. In addition, anyone who makes unnecessary purchases in order to earn rewards will never make money off of these cards. Finally, those who sparingly use rewards cards with high annual fees may not save any money once those fees are taken into account. Thankfully, there are many rewards cards offered with no annual fees.
By understanding the advantages and drawbacks of rewards credit cards, you can understand how a rewards credit card can save you money.