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Are credit card reward programs overpromised and underdelivered?

Reward programs are banks’ way of enticing customers to sign up for their credit cards. But are they as rewarding as they are made out to be? rounds up the pitfalls to look out for before you delve into the business of credit card reward programs.

 By: Ambareen Musa, Founder & CEO,

Loyalty reward programs on credit cards promise everything from cash back to free flights if you spend a certain amount each month. Banks offer these rewards as an incentive for spending more on their card. In the pursuit of great rewards, it is easy for consumers to get carried away. We summarize the full particulars of these credit card reward programs so you can have them work to your advantage.


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What’s the Catch?

Reward cards are typically offered at a higher annual fee as well as a higher interest rate than traditional credit cards. The rewards offered by banks on credit card spend come at a cost to the bank. To make up for this cost, banks rely on credit card revolvers – The ones who carry a balance on their credit card. It is the interest that you pay on your credit card that generates revenue for the card providers.

For the average consumer, the lure of a reward leads to large spending and possibly, debt accumulation. More often than not, the value of these rewards does not compensate for the amount spent by the cardholder to meet the minimum spend requirement every month. Spending more to take advantage of the reward, in turn, defeats the whole purpose of getting the reward.


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The Downside of Reward Programs

Credit card reward programs promise everything from air miles and cashback to loyalty points and gift cards on your card spend. In recent years, these programs have earned the reputation of being over-promised and under-delivered, since they come with numerous strings attached.

For cashback credit cards, issuers usually cap how much cashback you can accrue in a year. These cards can sometimes also be misleading. A specific cashback credit card, for example, may give you a 5 percent cash back on grocery transactions and very little to zero on everything else.

Air mile redemption through reward programs can be extremely tricky. Airlines have very limited availability of reward seats, blackout dates and require booking over the phone. Sometimes the booking fee and taxes tacked on the redemption are so high that flying a regular budget airline is a better option.

Hotels too are very stringent about blackout dates, duration of stay and capacity restrictions when it comes to reservations through reward programs.


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How to Make a Rewards Credit Card Work for You

First and foremost, it should be noted that a rewards credit card can only work for you if you intend to pay off your balance on time and in full each month. Otherwise, with the high interest rate on your card, you are really not getting the deal that you think you are. It is also important to stick to your budget and avoid purchases just to earn points.

Next, a clear understanding of your priorities, spending habits, and incentive preference are necessary before you sign up for a credit card reward program. Restrictions attached to your card should also be clear.

If you are not keen enough to take advantage of the trickier programs, go for reward programs that offer ease of use. The cashback program, for instance, is a good option since it directly applies the cash back to your statement without putting in any effort towards redeeming it.

In addition, loyalty points, air miles, and other rewards should be redeemed in a timely manner, and care should be taken to stay within the limits of the reward program.

And most importantly, don’t skip the fine print. Read through the terms of use of your rewards credit card to make sure you can easily use the reward you are trying to earn.