How Do Credit Card Reward Programs Work?

When they issue credit cards, the credit card companies are depending on you carrying a balance. Their profit comes from the fees paid by stores and services that allow you to use your card, annual charges, interest, and penalties. Because there is so much competition between the various companies, several of them offer special deals: low finance charges and even a percentage of money back on your purchases.

If you pay your balance completely every month, then low finance charges are not particularly alluring because you have no need for them. Cash back is a different story.

Until more people get this figured out and credit card company profits go down significantly, cash back on your credit card purchases is a great reward for responsible customers. In fact, there are a couple of advantages to exploring which card companies will give you the best deal. First of all, you will benefit from larger amounts of cash back. Some cards will give you more back based on particular purchases, such as a greater percentage on gasoline purchases or a greater percentage on the stores or services you use most often. If you know what your spending patterns are, you can choose a card that offers you the best rate.

Cash back can come in the form of an actual check in the mail or a credit on your credit card statement. Some cards offer you gift cards at certain merchants. These may also be a good choice if they are to places that you actually use.

Secondly, opening a credit card account and paying it off on time, every month, is a great way to improve your credit score. For one thing, you end up having a lot more credit (your balance limit) than you actually use and that is a good thing in terms of your credit record. The only caution is that this is only an advantage as long as you are faithful in paying your balance in full every month. If you believe you might get tempted to let a balance ride, then don’t try this at home!

Essentially, the credit card companies are allowing responsible customers to benefit from irresponsible users of credit cards. Cash back offers are meant to snare unwary customers into a psychological trap: “I can afford this purchase…I’m getting money back.” They obviously were not created for people who pay off their balances; yet people who have the self-discipline to pay off balances can enjoy a small profit in addition to the convenience of the credit card service.