Understanding the Basics of Credit Card Rewards
Before you can start earning, it’s essential to understand the language of credit card rewards. The industry is filled with terms that can be confusing, but the core concepts are quite simple. Let’s break down the most important ones.
Key Reward Terms Defined
Cashback: This is the most straightforward type of reward. A cashback card gives you a percentage of your spending back as cash. For example, if you have a card that offers 2% cashback on all purchases and you spend $1,000 in a month, you earn $20. This can usually be redeemed as a statement credit (which lowers your bill), a direct deposit into your bank account, or a physical check.
Points or Miles: Instead of cash, some cards reward you with points or miles for every dollar you spend. These are most often associated with travel. For instance, you might earn 2 miles for every dollar spent on airline tickets. These points can then be redeemed for flights, hotel stays, or rental cars. While they can offer incredible value, they often require more effort to manage and redeem effectively.
Sign-Up Bonus: This is a large, one-time reward offered to new cardholders. A typical offer might be: “Earn $200 cashback after you spend $1,000 on purchases in the first 3 months.” These bonuses are a great way to jump-start your earnings, but only if the spending requirement fits your normal budget.
Annual Fee: Some rewards cards charge a yearly fee just for having the card, often ranging from $95 to over $500. These cards typically offer premium perks, such as airport lounge access or large annual travel credits. For most seniors on a fixed income, a card with no annual fee is the best and safest choice.
APR (Annual Percentage Rate): This is the interest rate you are charged if you carry a balance from one month to the next. High APRs are how credit card companies make most of their money. The fundamental rule of using rewards cards is to always pay your balance in full, making the APR irrelevant. If you pay even one dollar in interest, you are likely wiping out the value of the rewards you earned.
The Golden Rule: Pay Your Balance in Full
This point cannot be stressed enough. The entire strategy of earning credit card rewards hinges on one simple habit: paying off your statement balance in full every month. If you carry a balance, the interest you pay will quickly erase any rewards you’ve gained. Let’s look at a simple example:
Imagine you spend $1,500 in a month on a cashback card that earns 2% on everything. You’ve earned $30 in rewards ($1,500 x 0.02). However, if you only make the minimum payment and carry the remaining balance, your card’s 21% APR will start accumulating interest. On a $1,400 balance, you could be charged over $24 in interest for that month alone. Your net gain would be a mere $6, and if you continue to carry that balance, you will quickly find yourself losing money.
Rewards are a bonus for responsible credit use, not an incentive to spend more than you can afford. The goal is to profit from the system, not become a source of profit for the bank through interest payments.
