Why are there different types of rewards in credit cards?
Typically, banks and financial institutions offer different types of rewards in their credit cards to entice and target different market segments. This is mainly to cater their cards to people with different needs as consumers use credit cards for their own specific purposes, some as an emergency channel while others for spending and shopping.
What are the main types of credit card rewards?
Generally, a credit card comes with either one of the 3 which are Cashback, Points and Miles.
Cashback credit cards
Also known as rebate cards, you get a certain percentage back whenever you charge anything to your credit card. This type of reward is the easiest and most used because it is convenient and well-liked. Cashbacks usually are applied automatically into your statement where it can also be used to offset your outstanding amount. Cashback rewards do not usually expire although a lot of banks do not allow you to redeem them as cash (so as to encourage you to make the transaction through the credit card).
This type of reward is similar to discount vouchers or coupons. The rewards point system lets you collect points when you charge any payment through your credit card. In return, you can use the points at selected merchants. Depending on the credit card and the issuer, the value of the points will never be the same. You normally will need to pay a small fee when redeeming the points (subject to the issuing bank).
This is a common system adopted in travel credit cards where you collect air miles points when you make transactions on your credit cards. The underlying concept is similar to the rewards points system but instead of giving you discounts and such, you actually get air miles that can be converted to flight tickets and other travel services. Some cards also allow you to convert your points to a frequent flyer loyalty program.
How do I choose the right rewards credit card?
Each of the 3 types of rewards is specifically targeted at:
- Travelers – Miles credit cards as you get to collect points that can be used to redeem travel services in the future.
- Shoppers – Points rewards that give you more options and discounts with certain merchants.
- Savers – Cashback cards as it is convenient for you to pay less in your credit card bill.
While the 3 are quite straightforward, you might want to consider the convenience of these cards. A shopper might consider a cashback card because it is more convenient. Using points rewards requires additional effort to look for rewards or discounts that you want. Take note that certain cards do have additional requirements like minimum spending per month or administrative fees.