Everything You Need to Know About the Credit Card Reward Programs

While credit card rewards could be initially complex to comprehend for those unfamiliar with them, you might be overlooking potential benefits if you are a regular credit card user. Credit card rewards programs allow you to earn points on specific purchases, providing an opportunity to optimise your budget.

It is important to note that various types of rewards credit cards are available, and the key is to find one that aligns with your spending habits and is accessible based on your credit score.

To make the most of these opportunities, it is advisable to understand how credit card rewards programs function and to identify the one that suits your needs.

What Are Credit Card Rewards?

Using a credit card for your purchases enables you to earn cashback, points, or airline miles that can be utilised to offset your balance, make travel bookings, or for other purposes. This benefit positions credit card rewards as a wise option for generating additional value from your regular expenditures.

To maximise the benefits of a credit card reward program and earn the highest amount of cash, points, or miles for your spending, it is advisable to choose a card that recognises and rewards your existing spending patterns while also offering rewards in line with your priorities.

How Do Credit Card Reward Programs Work?

Credit card rewards provide cardholders with points, cash back, or other perks based on their spending. The funding to credit card providers primarily comes from interchange fees paid by merchants, in addition to the annual fees and interest payments made by cardholders to the credit card companies.

The primary categories of rewards are points, miles, and cash rewards. Points and miles function similarly, allowing you to exchange them for specific redemption options, such as free or discounted flights, hotel stays, and car rentals, gift cards for specific vendors, discounts on everyday purchases (e.g., at grocery stores, gas stations, or supermarkets), etc.

The accumulation of these points or miles depends on the rules of the specific reward program, and each program typically offers bonus rewards for certain types of spending. For instance, a business travel credit card might provide 3 times more miles for travel-related expenses than miles for other purchases.

As discussed, there are three primary categories of credit card reward programs:

1. Cash Back:

The cashback rewards are equivalent to a percentage of your total spending, typically ranging from 1% to 2%. Some cashback credit cards provide higher rewards, such as 3% to 5%, for specific categories like gas, groceries, or dining. Cashback can be redeemed in various ways, including as a statement credit, a check, or an electronic transfer to your bank account.

2. Points:

Credit cards typically offer points at a base rate of 1 point for every 100 rupees spent. Points can be redeemed in various ways, such as for merchandise, gift cards, magazine subscriptions, and hotel stays.

3. Miles:

These cards provide airline miles for every 100 rupees spent. The accrued miles can be redeemed for hotel accommodations, airline tickets, and other travel-related options. While these cards are typically miles-based, some also offer cashback rewards.

How to Maximise Credit Card Rewards?

1. Get the Right Credit Card:

You should look for a credit card that not only improves your purchasing capacity but also provides complimentary membership to well-known hotels, airlines, gyms, brands, etc. Consider the convenience of managing multiple loyalty programs directly through your credit card. Whether you travel frequently or require hotel stays often, the ideal travel credit card has the potential to unlock additional benefits beyond its own rewards program. This way, every expenditure becomes an opportunity to accumulate points, ensuring you earn while you spend.

[Also Read: How to Choose the Right Credit Card in Four Easy Steps]

2. Use Your Welcome Bonus:

Many credit cards offer attractive welcome bonuses, also known as sign-up bonuses, providing cardholders with the potential to earn substantial rewards, often amounting to hundreds of rupees, by meeting specified requirements after initiating an account. Typically, credit card issuers mandate that cardholders spend a defined sum within the initial months of opening the card to qualify for the sign-up bonus.

In order to qualify, it is essential to thoroughly review the terms of the bonus offer and align your spending accordingly. This bonus can prove financially beneficial, allowing you to apply it towards a monthly payment or a significant purchase.

3. Redeem Your Rewards Strategically:

Visit your credit card's rewards program portal to explore the various options for redemption. If your card provides cash back, you may have choices like a statement credit or direct deposit. For those accumulating miles, the portal will guide you on redeeming them for airfare, hotel stays, and other perks. In the case of points, you might have the flexibility to choose from gift cards, merchandise, and more.

It is important to note that the value of your redemptions can vary among the options. For example, redeeming with air miles might yield a value of 1% mile, while cashback could offer only 0.7% cents in value. Furthermore, some redemptions may have specific requirements, such as a minimum cashback earnings threshold, like Rs 2,000, to redeem for a gift card.

4. Timely Settle Your Bills:

Charging all your expenses to a credit card can increase your rewards, but the potential benefits of credit card rewards are often nullified if you maintain a revolving balance each month. This is because cards with a revolving balance accrue interest, which becomes an additional payment alongside settling your existing purchases.

Continually using a credit card to exceed your financial means can lead to a substantial debt burden that is challenging to overcome. While it is understandable that people may resort to credit cards during financial constraints, paying off the entire balance each month is advisable whenever feasible. By avoiding a revolving balance, you can take advantage of the credit card rewards without incurring unnecessary interest charges.

Nevertheless, if you can settle your bill in full at the end of the month, using your credit card for all transactions is best to maximise rewards.

[Also Read: Why Paying Minimum Dues on Credit Cards Is a BIG Mistake!]

5. Read the Fine Print:

Certain credit card issuers have specific regulations concerning how retailers are categorised and whether they qualify for bonus spending categories.

Additionally, some credit cards have intricate processes for redeeming rewards or setting limits on the maximum amount of cash back or points you can accumulate at once. It is crucial to pay attention to the type of redemption that offers the most value.

To conclude:

Many credit card reward programs exist in the market, so choosing offers that align with your specific needs and preferences is advisable. Understanding how to convert your spending into rewards is crucial, and an easy and flexible redemption structure can make a significant difference.

We are on Telegram! Join thousands of like-minded investors and our editors right now.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.