Reward credit cards and how they work

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Credit Card Applications » Research » Guides » Travel with Credit Cards » Reward credit cards and how they work

Reward credit cards and how they work


Updated: December 26, 2012

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While rewards provide the much needed respite during bad financial phases, they have certain disadvantages that cannot be ignored. credit card companies provide these reward schemes for a reason, which is to encourage the use of credit cards. Increased use of credit cards not only puts the consumer in the risk of falling into bad credit zone, but also increases the chances of landing in big debts. Reward schemes are designed to give better rewards if the customer spends larger amounts of money. Most people feel compelled to make full use of the reward scheme and spend money only to get a fraction of it back. The rewards earned can no way make up for the money spent, putting the customer at loss. Annual Fee: There are many other disadvantages of using reward credit cards, other than the risk of debt. First of all, if the credit card offers a good reward scheme, then most certainly, there will be an annual fee appended along. Free credit cards do not offer great reward schemes, and if the customers want better, they will have to pay for it. Most of the times, annual fee will outnumber the reward amounts that can be earned. The customers should calculate the annual fee and rewards earned before signing up for the cards. Limited: Reward schemes almost always have strings attached to them. Either in the way that the rewards can be redeemed, or the amount of rewards that can be earned every billing cycle, there are always restrictions imposed on customers. Upper limits for rewards are set by the credit card companies, which limits the profits that the customers can make. For example, in point reward system, a customer needs to reach a certain lower limit to redeem the points collected. If the upper limit set is reached and the points are redeemed, any purchase made does not contribute towards point collection. This is a big disadvantage if the customer uses the credit card daily. Also, restricted participating companies make it difficult for the customer to hunt for them, every time they want to use credit cards. Higher interest rates: Credit cards that offer good reward schemes have very high interest rates compared to other cards. This will not matter if the bills are paid in full and on time, but if there are any missed payments or even payment in parts, the outstanding balance keeps accumulating. This will put the customers in risk of debts. Reward schemes are always subject to terms and conditions decided by the credit card companies, which gives them power to revoke these reward schemes whenever they want. Missed bill payments and lower credit scores will revoke these reward schemes from the credit cards, leaving the customer with a debt to deal. Buy more to get more: Credit card companies make a big profit in service charges, when a departmental store accepts the credit card. To promote spending habit, the reward schemes will always direct the customer to spend more and more. It is absolutely pointless if the customer misses a bill and rewards are revoked.

All rates and fees, and other terms and conditions of the products mentioned in this article/post are actual as of the last update date but are subject to change. See the current products’ Terms & Conditions on the issuing banks' websites.
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