While credit card companies make money off customers through fees, interest and penalties, savvy consumers are switching to credit cards that reward them for using the card. If you are going to use a credit card — and it’s hard to live without one — choose one that gives gives you something back. And something that you can use.

The Different Types Of Credit Card Reward Programs:

All rewards programs base the rewards you will receive on the amount of charges you place on the card. The more you charge, the more you earn. The reward points, miles, dollars (or whatever vernacular is used by the card company) are accumulated and you can ask to receive them upon demand after certain minimum levels are reached.

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• Cash-Back Rewards: Cash-back reward programs allow customers to earn cash as their reward. Most of these cards have customers earning about 1% on their purchases, which can be redeemed for cash or used to pay down any balance on the card. Additionally, some rewards programs allow frequent users to earn more, while others reward customers for shopping at specific retailers. For example, a cash-back rewards card may be associated with dozens or hundreds of vendors at which you can earn a higher percentage if you shop with them. And some companies offer rotating “specials;” for example, 5% cash back on gas for the next quarter’s purchases at any gas station.
• Airline Mile Rewards: This is the most popular non cash-back rewards program and there are a number of popular personal and small business credit cards rewards programs available, so it pays to do your homework. There are two different types of airlines miles rewards cards. There are those that reward customers with miles from any airline, and, most commonly, there are those that are airline specific. Regardless of which type a customer chooses, these programs allow you to earn redeemable miles each time they make a purchase. Airline specific cards generally offer higher rewards. Keep in mind, though, that airlines are one of the shakiest businesses around, and the industry has a history of bankruptcies and mergers; it’s possible that you could lose accumulated miles. The other downside of airline miles is that restrictions make it more difficult to get the flight you desire, in comparison to paying normally. Many smart consumers prefer to maximize return on a cash-back credit card, and then shop for airfare bargains.
• Retailer Rewards: These cards are associated with a specific retailer and allow customers to earn a percentage of the value of each purchase made at any retailer. But the give greater rewards points for shopping with the specific retailer. Those reward points can then be “spent” at the associated retailer.
• Automobile Rewards: Automobile rewards programs allow users to earn a percentage on their purchases, which may be redeemed for cash or used to purchase an automobile. These cards are associated with a specific automobile manufacturer. With the economic trouble car companies face, we’d hesitate to recommend this option.
• Gas Rewards: Gas rewards cards are broken up into two different categories: general gas cards and cards that favor a specific gas provider. These cards allow customers to earn cash back rewards on their purchases, while earning more for making gas and some auto-related purchases. Brand specific cards are ideal for those that stay close to home and prefer a specific gas station, while general cards will most greatly benefit travelers.
• Travel and Hotel Rewards: Travel and hotel rewards programs give customers points for their purchases, allowing them to redeem their points on airfare, hotels and rental cars.

What to Look For in a Rewards Program:

Rewards programs are attractive to many consumers because they give them the opportunity to receive something back for simply using their card. However, many of these credit cards require customers to purchase quite a large amount on the card before earning a reward, yet they charge an annual fee. If you don’t use the card much, your fee can exceed the value of the reward. For example, a cash back program that rewards customers with 1% back of their purchases, will require that customers spend at least $10,000 to earn $100. If that same card includes a $100 annual fee, nothing has been gained.

Some programs have tiered levels that must be reached in order to get to the advertised rewards level. Make sure you understand this, and blend the rates with your expected purchase levels to know what you really will earn.

Some programs have a limit on how much you can earn in rewards each year. For example, if you can earn 1% o $10,000 of purchases, you’ll only really earn 0.5% if you charge $20,000 on the card.

If you pay your bill late or break the rules in some other way, brace yourself for the consequences. Many cards will take the earned rewards away. You might be able to get them back for a fee, and that’s likely on top of the late fee and interest charges you’ll already be paying.

Cash Back Cards are the Best Bet

Not only do we recommend cash-back cards only, according to J.D. Power’s 2009 credit-card satisfaction survey, 62% of respondents say that they opt for cash, almost five times the number of those who choose the next most popular pick, air miles.

As Julie Loeger, senior vice president of branding and product management at Discover. said, “Everyone knows what a dollar means. Not everyone knows what a point means or what a mile means. Cash is cash.”

And why do we recommend cash-back cards? 1) they are easy to understand, 2) you can pick what you wish to buy, or just stick it in the bank, 3) Unforeseen changes in your finances in the future may put you in a position where you find you desperately need the money more than you do than an airline ticket, shopping spree at Sachs Fifth Avenue or any other thing you are locked into. And, major credit card companies issuing cash-back cards are more likely to stay in business than a specific airline, retailer or other company.

Tips for Using Rewards Cards

Redeem Frequently. Don’t let your rewards pile up in your account. You never know if some fine print you didn’t read will allow the credit card company to wipe out your reward, or even go completely out of business.

Keep up with the specials offered and take advantage of them when you can.

Some cards let you redeem your rewards at participating online vendors where you can, at the time of redemption, obtain a discount on your purchase. So, for example, if you were going to redeem $50 in cash back, and see that you can instead click to purchase movie tickets at 50% off, this would be off benefit to you if you would have gone to the movies anyway. So, in doing this, you not only earn the percentage cash back when you make your charges, but you get a good discount on a product you already need if you take advantage of a special. Nice savings.

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