What Is a Rewards Credit Card?
While some credit card companies charge interest when you use their product, others offer you incentives in the form of credit card rewards.
Rewards credit cards work like any other credit card:
- You use them anywhere credit cards are accepted.
- They carry interest.
- They require minimum monthly payments.
The key benefit rewards credit cards offer is in the name: Rewards! Every time you use a rewards credit card, the card issuer gives you a percentage of your purchase back in points. Then you can use these points to purchase items.
There are different types of credit card rewards but they all offer benefits the more you use your card. The value of the rewards as well as the types of purchases that earn you those rewards vary by credit card.
Types of Credit Card Rewards
Cash, points, or miles are the three most common types of rewards. Cash incentives might help you pay down your credit card bill. Travel rewards can assist you in earning free travel for you and your loved ones.
You can use your rewards to buy Christmas and birthday gifts. You might also put your earnings to good use by investing them.
The Fidelity Investment Rewards Signature Visa, for example, invests your earnings. The Wells Fargo Cash Smart card leverages your rewards to pay down your Wells Fargo mortgage.
Cash Rewards
Cash rewards are the simplest and most basic to apply, but they don’t always result in cold, hard cash in your hand. Some programs only enable you to redeem monetary rewards as a credit to your account.
Note: When rewards are paid as a statement credit it will reduce your balance, but it won’t count as a payment to your account.
Some cash rewards credit cards allow you to redeem your points for a check or direct deposit into a bank account.
You may also be able to exchange your cash rewards for gift cards through your card issuer’s merchant partners.
There may be a minimum redemption amount—say, $25—or you may be required to redeem your rewards in specific increments.
Points Rewards
The value of your points is determined by how much you spend. For example, you could receive one point for every $1 you spend.
- $69 annual fee
- Earn 2X rewards on some purchases
- APR of 15.99-22.99%
You may be able to redeem your rewards for gift cards, cash, or even travel depending on the card issuer.
Redeeming your points for gift cards may provide you with more bang for your buck because many merchant partners provide discounts ranging from 10% to 20% off the gift card price.
Auto rewards cards and hotel rewards cards are two examples of point reward cards.
Travel Rewards
With a travel rewards credit card you can earn miles that you can redeem for airline tickets.
The number of miles you can earn will vary by the type of card you have and the number of miles you need to purchase a flight will vary by the frequent flyer program.
You may be able to convert your miles between programs but you may end up losing some points in the process.
Flat vs. Tiered Rewards
Credit card rewards programs are generally structured in one of two ways.
It might offer a flat rate of rewards on all purchases you make, e.g. a credit card may pay out a 2% cashback reward on every purchase you make.
- No annual fee
- 13.99% APR
- Earn 2 points per $1 on all eligible purchases.
- 1% foreign transaction fee
You may also earn different rewards based on the category of your spending. Some travel credit cards pay higher rewards on travel purchases and smaller rewards on other purchases.
What to Look Our For
To qualify for a rewards credit card you generally need to have a good credit score.
If your credit score needs some work, you may find it hard to qualify for a rewards credit card.
Keep in mind that rewards credit cards usually have higher costs than other credit cards. As an example, annual fees are common for rewards credit cards and this can often be more than $500 per year.
Rewards credit cards often also have higher interest rates than other credit cards, which means that you shouldn’t carry a balance on rewards cards.
Always look for stipulations for earning rewards in the fine print of your credit card terms. For example, a program might offer a 5% cash reward but there might be a limit on the rewards you can earn at that rate.
Warning: Your credit card issuer may change the rewards program without warning, so always ensure that you carefully go through everything that comes with your billing statement.
Not all rewards are forever. Some credit card reward programs will cause your rewards to expire if you don’t use them within a certain time.
The best reward credit card programs won’t allow rewards to expire although most will have you forfeit your rewards if you fall behind on your credit card payments.
How to Use a Rewards Credit Card
Like any other credit card, there are certain things you must take into consideration before using your rewards credit card.
Your Ability to Pay Off the Card
Interest charges are rewards killers. Most rewards credit card rates sit in the 1.5 to 2.5% range, whereas interest rates are more than 15%, so it’s easy to see how quickly your interest charges can quickly offset and exceed your rewards.
The key here is to use your rewards credit card as a debit card by paying off any new charges immediately.
If you cannot pay immediately or feel it would be too time-consuming, then you can pay it off once a month and still avoid interest fees.
The bottom line is to never carry a balance over into a new statement period, as this will eat up all those rewards you just earned.
And no, you do not need to carry a balance on a rewards credit card for your points to show up, as they are added by purchase, not balance.
You can literally buy a TV today, get 5% rewards on it, pay it off today and still get your rewards points.
Maxing Out Those Rewards
Maxing out rewards is a big part of playing the rewards credit card game. You have to find out where your card gives the most rewards and use it in that store or on that product.
So, if your rewards card gives 5% points at the gas station, but a debit card is used to get fuel, you’re missing out.
Attention to detail becomes especially important if you have a revolving-category rewards credit card.
While these may be the best credit cards for rewards, in the long run, you have to keep a close eye on that rotating category.
Find the Best Rewards Credit Cards 2021
Everyone’s spending habits vary, and this is why there are so many rewards credit cards. Do your due diligence by making a pros and cons list for what you are looking for.
Then begin the research and find out which rewards credit cards fall into categories you shop in.
If you’re an avid Amazon shopper, find a card that gives big rewards there. Do you have a long commute and go through gas like crazy?
Get one that offers great rewards at gas stations. If you are a foodie who buys a lot of food and enjoys eating out, look into the Premier Dining Rewards Card.
Keep in mind that this also means that you may have multiple rewards cards.
With that being said, you don’t want too many cards in your name, so choose your credit cards carefully and cancel any that aren’t getting you rewards you want.
Some lenders check how many credit cards you have opened previously, and will deny you even if you have great credit.
An example of this is Chase Bank, which will not grant specific credit cards if the applicant has opened five credit cards within 24 months.
This concept is known as the 5/24 rule.
You also need to understand what the categories mean. You may have a rewards card that offers 5% on groceries but then notice that all the groceries you bought at Walmart only netted you 1% in rewards.
This is likely because your rewards credit card has Walmart classified as a department store and only pays base rewards points at department stores.
These are the types of details you will find in the terms and conditions when you sign up for the card.
Rewards Credit Card FAQs
How does a rewards card work?
A rewards credit card lets you earn rewards in the form of cash back, points, or miles.
What are the drawbacks of rewards credit cards?
Some people tend to overspend on their rewards credit cards. These cards can also attract higher interest rates than other credit cards, and might have confusing terms.
What can I do with credit card rewards?
You can redeem your credit card rewards in many different ways, such as gift cards, airline tickets, statement credits, hotel stays, and more.
