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Understanding merchant rewards programs

Offered by merchants of all types, rewards programs are marketing tools that encourage brand-loyalty purchasing through price discounts, bonus points and/or coupons toward future purchases, donations to your favorite charity and even cash rebates. If you're part of the program, you access it by using a membership card that looks like (and often is) a credit card. The card compiles information about your purchases and the rewards you've earned; it also stores information about you that's useful to the merchant when tailoring advertising that's pitched to your spending preferences.

While many rewards programs offer credit with (and rewards from) a particular merchant, other programs, offered by credit card issuers, may allow you to earn rewards, such as gift certificates, that may be used with a wide variety of merchants. And in most cases, these cards offer the option of earning cash back each time you use the card. A cash back reward can be used anytime, anywhere.

The rules, restrictions and limitations on what you may earn through a rewards program can be complex. Most programs offer a larger percentage reward for purchasing select products or categories of products than they do for all products. You may have to spend a minimum amount per month, quarter or year to get any rewards, and there are often limits both on the amount of rewards you can earn and on the time allowed for cashing them in. What's more, the originator of the rewards program may change the rules or cancel the program altogether with little notice or recourse.

The prohibition against certain dubious but profitable practices by the Credit Card Accountability, Responsibility and Disclosure Act of 2009, coupled with the overall tightening of credit, have made the reward card market less lucrative, and credit card issuers with rewards programs may begin to take steps to preserve their profit ratios. Such steps could include higher interest rates and annual fees, restructurings of reward policies that water down the rewards, inactivity fees and/or reinstatement fees to restore points lost because of late payments.