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What are Reward Credit Cards?Does your credit card offer you something back, whether points, cash, miles, time, gas, merchandise, hotel stays, a donation, or a contribution, over and above the standard benefits of credit card ownership? If so, you have a rewards card. Any card that offers something over and above the ability to borrow money on the spot and pay it back (with or without interest) in the future, is a rewards card. There are many, many types of reward cards (see the article “Types of Reward Credit Cards” for more information). One of the main differences between them is that some have a specific type of reward and some offer you more or less choice. For example, you can find cards for which a percentage of your purchases is:
Of the cards that offer you choice, some give you miles or points that you then have some limited choices for. For example, when you are awarded miles for airline travel, you choose where you fly and (depending on whether the program has blackout dates, etc.) when. Your choice in this situation is the form of whether you go to Toledo or Tahiti. Programs with the most choice award you points which you can choose to convert to cash, statement credit, merchandise, or airline miles, your choice. And, of course, one also has unlimited choice when one chooses to be rewarded with cash, because once it’s in your pocket, you can spend it as you wish. Where Does the Reward Come From? Suppose that you have a credit card with no annual fee. Furthermore, suppose that you do not carry a balance, do not withdraw cash, and pay your bill on time each month. This means that you pay exactly for what you purchase. Now suppose you make a purchase from a merchant. You buy $50 worth of merchandise and authorize a credit card payment. The $50 appears on your credit card payment, and you pay it. Since no money has been collected over and above the precise amount you owe, you may wonder how your reward is being financed? There is actually another part of the process of credit card use that is key in funding rewards. Merchants pay a fee, which is generally a percentage of the purchase plus a flat fee, in order to use the credit card system to collect payments. This commission is called the discount fee. Being able to accept credit cards is an advantage to the merchant, because it offers more protection than a check. Each credit card company (Discover, VISA, MasterCard, and American Express, etc.), sets its own fee for the service. So, when the merchant is “paid in full” (assuming that there is no problem with the merchandise or other dispute), the merchant receives your $50 minus the discount fee, and the reward is a portion of the discount fee, translated into whatever terms the reward is offered in. The discount fee, along with late fees, interest, and any annual fees, are some of the ways that card issuers make money. And because there are now so many, many types of credit cards, one of the ways that credit card issuers have decided to go about inspiring and feeding customer loyalty is basically sharing the discount fee with the card holder. How Are the Rewards Distributed? Credit card companies are very inventive in how they distribute rewards, as they continually aim to broaden their customer base and lure customers away from their competitors. Here are some of the rewards that you may see:
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