Credit Card Rewards Programs
Whether you’re shopping for your small business or holiday gifts, you probably don’t make all your purchases in cash. If you're not using the right credit card, or no card at all, you could be leaving money on the table. This month we talk about the types, benefits, and drawbacks of credit card rewards programs. There are countless options. As part of our business foundation services, BATS Xpress can help you to select the card that offers the best rewards for your situation.
Reward Yourself: Get Extra from Your Credit Card Purchases
The overwhelming majority of our shopping is not done in-person or paid for with cash. That means that you can pay for almost everything with a credit card. Yet, many consumers aren’t tapping into the benefits of credit card rewards programs to get extra from their purchases. If you're not using the right credit card, or no card at all, you could be leaving money on the table.
There are three types of primary benefits offered by credit cards: cashback, points towards future purchases, or airline miles. Cardholders earn these benefits through their spending behaviors. Some cards may also offer signing bonuses or other incentives to open an account. “While the value of rewards varies between programs, redemption options are often similar,” CNBC reported. Credit towards your balance, direct deposit into your bank account, gift cards, travel reservations, and charitable donations are some of the typical redemption options that they listed.
The best thing about credit card rewards programs is that you get extra value from the purchases that you have to make. If you’re already buying office supplies or gasoline, then it’s really nice to get a reward that you can use towards more materials or even a fancy vacation. Nerd Wallet recommends putting “as many expenses as you can on the account” to maximize the benefits from a single card. For business owners and busy households, this is also a helpful strategy to simplify monitoring your expenses because they are consolidated in a single bill.
Wait! Don’t sign up for a new credit card and start shopping before you finish reading this article. We also need to warn you about many of the risks of these programs. Most importantly, we would never advise our clients to spend more money than they can afford to just to tap into these benefits. Please don’t misunderstand this blog as a blanket endorsement of credit card rewards programs or credit spending. We always encourage you to set appropriate spending limits to live and thrive without the unnecessary stress of bills that you can’t pay.
The Motley Fool service noted that “when you're earning points or cash back, it's even more tempting to make that big impulse buy you really shouldn't.” To avoid this trap, make sure that you can pay off the card balance in full every month. This is a fundamental rule of budgeting that’s true in every financial situation, whether buying with credit or managing your cash flow fluctuations. (Don’t know how to figure out what the appropriate spending limit is for your family or business? Contact us for help.)
If you only buy what you can afford, you also neutralize several other dangers of these programs. First, some carry very high annual percentage rates. “Even if you're earning 2% cash back on everything you spend, it may not cancel out the interest you would have to pay if you carry a balance,” explains US News & World Report. If you pay off balance monthly, it doesn’t matter what the interest rate is because you’re not paying it. Second, most rewards programs require good to excellent credit scores, typically at least 690, to qualify. Conveniently, one way to improve your credit score is to make sure you don’t have late payments. Third, some programs’ rules state that you can only accrue and/or use your benefits if your bill is completely paid. Wallet Hub warned that “rewards can expire, or be forfeited due to account inactivity, late payments, or account closure.” Other programs give additional incentives for zero balances.
There are several other warnings about using these rewards programs, such as reward thresholds, limits, expirations, and annual fees. These limits and fees don’t make the cards bad picks, but Nerd Wallet encourages cardholders “to keep track of your spending…to ensure you're maximizing the card” and program benefits. CNBC also noted that there may be tax implications for some rewards. “Most credit card rewards are not taxable, but be wary of those that don’t have a spending threshold required in order to redeem rewards. Although these cards offer an upfront incentive, you will be required to report those rewards as income later when you file your taxes.”
In addition to setting monthly spending limits, we also encourage you to carefully review the fine print of every offer to make sure you select the best program for your business’ or family’s financial goals. As The Motley Fool service noted, “the great thing about rewards is they allow you to get value back on every eligible purchase, just because you're paying by credit card.” However, you don’t want to sign up for a program whose redemption restrictions are too cumbersome to use the rewards or whose annual fee is so high that it cancels out the cashback benefits. There are countless rewards program options. As part of our business foundation services, BATS Xpress can help you to select the card that offers the best rewards for your situation so you can get back to running your business or family.