Whether you’re applying for your first credit card or shopping for a new card, it can be a challenge to compare your options and make the right decision for your personal finances.
One of the perks of having a credit card is earning cash back or reward points that you can redeem for gift cards or merchandise. At Addition Financial, one of the questions we hear from our members is:
"How do credit card points work?"
We also field questions about cash back and how that works. We’ve created this guide to help you understand the ins and outs of rewards cards, including cash back and points.
What is Cash Back?
Cash back credit cards are a perennial favorite for a reason. The concept behind them is simple. When you use a cash back credit card, you receive a percentage of what you spend as a cash back reward. It may be helpful to think of it as a refund.
The amount you receive will vary depending on the card issuer’s policy. The most common percentages offered are from 1% to 3%, but some cards may offer as much as 5%.
One variation on cash back rewards uses tiered rewards depending on what you buy with the card. For example, you might see a card that offers:
- 3% cash back on gasoline purchases
- 2% cash back on grocery purchases
- 1% cash back on everything else
When you’re evaluating cash back offers, it’s essential to read the fine print and make sure you understand what you’re getting. If you’re someone who does a lot of driving, then choosing a card where the maximum rewards come from gasoline purchases may make sense.
Here are some other things to be aware of when you’re considering applying for a cash back credit card:
- Some cash back credit cards have a minimum spending threshold for cash back rewards. It’s usually not high – $25 is a common amount – but make sure you understand when you’ll be receiving cash back before you apply.
- Some credit card companies give themselves a lot of time to credit cash back to their cardholders’ accounts. Here again, the key is to read the fine print. Everything else being equal, you may want to choose the card that rewards cash back quickly over the one that takes several months to credit your account.
- In some cases, you may be able to apply the cash back amount on your statement toward your monthly payment. If that’s something you would like to be able to do, make sure to choose a card that allows it.
- Don’t focus on cash back and ignore the interest rate and/or annual fee. Some cards make up for cash back by charging an annual fee and others may have a higher-than-usual interest rate.
The biggest benefit of choosing a cash back credit card is that you can use the money however you want. As you’ll see in a minute, there’s less flexibility when you choose a points card.
What Are Credit Card Points?
Credit card points are rewards that you receive when you use a credit card. They bear some similarities to cash back in that you’ll receive points based on how much you spend.
Unlike cash back, there are typically limitations on how and when you may use points that you earn from using your credit card. However, the benefits are still considerable and depending on the card, a points card may be a better bet than a cash back card.
How Do Points Work?
Credit card points are easy to understand. When you use a points credit card, you’ll earn points every time you make a purchase.
Like cash back credit cards, points cards can vary in the way they award points. Some offer a set amount of points for every dollar you spend. Others offer a tiered system. One example might look like this:
- 4 points for every dollar you spend on travel, including airfare, rental cars and hotels
- 3 points for every dollar you spend on gasoline
- 2 points for every dollar you spend on groceries
- 1 point for every dollar you spend in other categories
As was the case with cash back credit cards, it is essential to read the fine print and understand the way the card you’re considering works before you apply. Here are some things to look for:
- The points structure. How many points do you get and do they vary depending on what you buy? You should choose a card that rewards the purchases you are most likely to make.
- When are your points credited to your account? Some credit card companies will credit points to your account every month. Others may give themselves 60 or even 90 days to award points.
- Is there a time limit that applies to using the points you earn? Some credit card companies put an expiration date on points. For example, you might have only a year from when the points are earned to use them. If you want to accrue a large number of points for a big purchase, you might be better off choosing a card with no expiration date or, at least, an extended use period for points.
- Is there an initial points bonus? Some rewards cards offer an initial bonus. The structure varies from card to card but there’s usually a spending threshold you’ll need to meet to get the reward. For example, you might need to spend $3,000 in the first three months to get a bonus of 15,000 points.
As a rule, you can expect to get at least one point for every dollar you spend. You may be able to use the points for gift cards, merchandise, travel or cash back. However, it’s common for the redemption value of points to be lower for cash back than it is for merchandise.
What Kind of Card Should You Choose?
You may already know what kind of rewards card you would like, but if you don’t, here are some pointers for comparing and evaluating credit card offers.
Focus on Interest Rates and Fees First
Your first order of business is to evaluate the credit card as a credit card. By that, we mean that you should be looking beyond the rewards to how the credit card compares to other offers aside from the rewards.
For a true and accurate picture of a card, review the following things:
- Interest rates
- Annual fees
- Introductory periods
That last item is important because a lot of cards offer low or no interest for a short period. When you read the fine print, you should find information about how long the introductory period will last and what will happen when it ends.
Are You Looking for Short-Term or Long-Term Rewards?
The next question to ask yourself is whether you’re in search of short-term or long-term rewards. The answer should inform the type of reward card you choose.
As a rule, cash back cards offer an immediate benefit. If you get a $200 bonus after you spend your first $500, you can apply that money to your credit card bill or you can use it for other expenses.
On the other hand, points can usually only be redeemed for valuable items when you have accumulated a lot of them. Plus, there’s often a reduction in value if you trade in points for cash back.
Review the Points or Cash Back Structure
As we mentioned above, some rewards credit cards offer more cash back or points for certain categories of spending. If you know that you’re likely to spend a lot on gas, then you may want to choose a card that offers more points or cash back for gas than for groceries or other expenses.
Keep in mind, too, that some cards offer extra rewards for holiday shopping or for shopping with select retailers. If you’re a regular Amazon shopper, it probably makes sense for you to choose a rewards card that partners with Amazon. Addition Financial’s Premier Rewards card is an example. It offers 5% cash back on Amazon purchases.
Evaluate Bonus Offers
Finally, take a look at any bonus offers and decide whether they’re going to benefit you. We would never suggest spending money you don’t need to spend simply to get rewards.
Let’s look at a hypothetical situation. You’re evaluating a points card and you see that you can get a bonus of 10,000 points if you spend $1,000 in the first three months after getting the card. Maybe you know that you’re going to remodel your kitchen soon. If that’s the case, then you could buy your refrigerator with the rewards card to get the points.
If you’re not planning a major purchase, then you may want to choose a card with a lower spending threshold for a bonus to be awarded.
Now you know how cash back and credit card points work, it’s time to choose a card that will allow you to reap the benefits of using it. Addition Financial offers you a choice of the Premier Rewards Card or the Premier Cash Card. Click here to learn more.
