Rewards Credit Cards
Rewards credit cards are a whole group of cards that uses different stimuli in order to attract new customers. Usually reward credit cards are issued by companies like department stores, hotel chains, airlines, gas stations and the like, rather than financial institutions like banks but still it is not necessarily so. Rewards are generally in the form of discounts, free gifts or cash back, though actually the highest reward for a loyal card holder are low interest rates and fees and high credit limits.
The type of rewards varies widely and only the creativity of the issuer (and the legislation in the particular country) is the limit. The most common categories of rewards are cash back, theme rewards and basic rewards. Cash back rewards include discounts and most often cash is handled directly to the customer or transferred to an account that he or she has given. Theme rewards are usually gifts, gift coupons or presents of some kind, though it is also possible to reward customers with cash. Here the choices are really abundant. Basic rewards include frequent flier points, entertainment rewards and so on.
Different reward credit cards have different terms and conditions, so it is not possible to say if they as a whole are good or bad for the customer. There are reward credit cards that charge an annual fee of $50 or more, so if you are not a frequent shopper, it might turn out that you are actually losing money because of the reward credit card. But if you are a frequent shopper and you get a 1% discount, you might end with significant savings.
So, here is the trap. Do you really need this card? If you are a frequent shopper anyway, for instance at the local gas station, and you will spend your money there in any case, then you will most probably benefit from this program. But if you are just an occasional shopper, for instance at the local do-it-yourself shop, then the fees, charges and interest rates that are related to maintaining the card will be a burden for you. Also, even if you are a frequent shopper but don't spend much at a particular shop, for instance a local boutique, after you get the card, you might end spending more than before you got it.
One of the risks of reward credit cards is that they lure you to buy more and more. If you see that you get a discount for, let's say $500 worth of purchases but you planned to spend only $400, you will soon notice that you (or your family members) buy more than they need just because of the discount. Also, if you buy more than you can afford and you fail to pay your balance at the end of the month, the amount of interest you will pay will certainly be more than the savings you made.
Rewards credit cards are often criticized to be a cheese-and-trap approach but certainly this is not fair to say because credit cards are not to blame, when you can't control your own spending. In any case, it is best to know that there is no free lunch and if you are not the master of your shopping decisions, then nobody else can help you.