Picture being able to choose between a mountain bike or a smart watch after you’ve filled your gas tank. No, there’s no catch. This is real. It’s happening right now. Credit card users all around the world are being rewarded with luxurious gifts and perks just for purchasing everyday expenditures with their rewards credit cards. Believe it or not—if used correctly—that bag of elbow macaroni purchased from the grocery store the other day just may be the deciding factor in getting that new espresso machine or dream vacation.

But...How?

How does a credit card company afford to give out extravagant rewards and gifts to its credit card users? The answer—although long and a bit convoluted—basically comes in three main sources of revenue: interest, fees, and interchange rates.

You may want to thank some people who forget to pay their credit card bills on time (or maybe that’s you) because part of the interest that procrastinators have to pay goes to the rewards credit card fund. Annual fees also add to the rewards stew. In order to have the perks of travel rewards or the ability to redeem points for a new gas grill, rewards credit card users often have to pay an annual fee. Kind of like a membership fee. Most card users are happy to pay as the annual fee is a minimal amount compared to the prizes and gifts received in return.

The last stream of revenue is called interchange rates. Unlike recognizable annual fees and interest rate charges, interchange rates are fees nearly invisible to consumers. Whenever you use a credit card the merchant pays a fee in order to accept the payment. The portion of that fee then goes to the card issuer, which is typically one to three percent of the price plus a flat 10-cent fee. These rates vary based on the merchant. Although consumers don’t see the charges listed in a laid out chart of fees and interest rates, they’re effectively paying them as merchants already instill those expenses into their prices. So the next time you purchase something from a store and it seems a tad overpriced, the interchange rate may have something to do with the sticker shock.

Pros

Early Bird Gets the Reward:

When a rewards credit card is used efficiently, such as little to no late payments and paid in full each month, card users take full advantage of their rewards credit card by making their money work for them. Think of it as a point system where every swipe of the rewards credit card results in a rack up in points. Those points are then saved into the rewards card system and then used to purchase rewards items. Kind of like a Dave and Buster’s except you’re rewarded with practical things, not stuffed animals or endless supplies of emoji key chains. Depending upon the rewards credit card, users may redeem those rewards points to obtain anything from luxury gift items, cash back or mileage for airline travel.

Free-ish Gifts:

Again, who wouldn’t want to be rewarded with gifts? Although not technically “free” as the rewards are only given to those who spend money with their rewards credit card, the gifts and rewards given just for using the rewards credit card is an added bonus. You can also kill-two-birds with this rewards option and give away the rewards items as gifts. Weddings, birthdays and anniversaries will no longer be forgotten as you’ll have a special stash of gifts already available for your choosing.     

Timing is Everything:

The timing in using a rewards credit card could also rule in your favor when important life expenditures come up. As a way to attract new users to their rewards credit card, some credit card companies offer automatic points just for signing up. They may also spice up the incentive by including bonus rewards points if a certain amount of money is spent within the first few months of getting the rewards credit card. Life expenses such as paying for college or planning a wedding just may help you get one reward point closer to that cozy dorm room or ideal honeymoon.         

Cons

Procrastinators Beware:

If you’re on time with all of your credit card payments, then the new espresso machine or Roku TV is most definitely free of charge. However if lateness in payments seem to be the trend in your credit card statement, you may be paying for those rewards gifts yourself and then some. Rewards credit cards generally have a higher interest rate, which may force you to chase after paying the interest of a late payment before paying off the actual amount that you’ve accrued. Some words of advice: don’t spend more than what you can pay off within a month. Otherwise you’ll be a credit card company’s best friend and also a loyal contributor to the rewards credit card fund.

Waste Not, Want Not:

The annual fee should also be taken into consideration when deciding whether or not the rewards credit card is right for you. The rewards earned on a card after a year of spending should exceed the card’s annual fee otherwise you’re wasting your money. It’s as if you’re paying for a gym membership and not stepping inside the facilities … ever. You may as well choose a credit card that has no annual fee. Although that credit card may not come with rewards options, at least you won’t be paying for a service that you do not use in the first place.

Fly or Nothing:

Rewards cards that come with rewards options is also something to think about. This allows the user freedom to redeem whatever they choose. The downside to choosing a rewards credit card that limits your rewards is that you’re obligated to just those rewards.

This particular scenario occurs with rewards credit cards that strictly offer mileage for airline travel as the reward. If there’s no way the credit card user will ever be able to take time off to travel—let alone travel on just one particular airline carrier—then there’s no use for that mileage credit card. Yes, unfortunately there are some mileage credit cards that require you to use your accumulated miles by a certain date or make you pay for your donated mileage to another user. Not all of them but just know that there are some credit card companies whom uphold similar restrictions and enforce strict fine print regulations.    

Decision Time

Rewards credit cards, in general, can be easily managed and appreciated when used correctly and resourcefully. When you think about it: why not receive gifts in return when all you have to do is purchase items that you need to buy in the first place? This avenue allows your expenditures to count for something. It’s as if you actually take advantage of the gym membership that you’re paying for and as a reward for consistently showing up, you receive special gifts in return. Whether you need to purchase dish soap or new tires for your car, a rewards credit card transforms necessity expenditure items, or any expenditure items, into premiere merchandise that would have otherwise cost you an exorbitant amount of money.

If and when you decide to apply for a rewards credit card, as long as you remain conscientious in paying off your statement in full each month, you’re good to go. The rewards—when it comes to using a rewards credit card—will be well worth the time and responsibility.