What Is a Rewards Credit Card?
Rewards credit cards are ones that let you capitalize on your spending by earning cash back, points or miles. While several such cards come with bonus categories, others earn a flat rate on all purchases.
A rewards credit card lets you earn rewards when you use it to make purchases. Rewards may come in the form of points, miles or cash back, and the options for redeeming your rewards depend on the card you get. Reward rates may vary significantly from one card to the next. Several cards let you earn higher rewards through category-based spending. Getting a rewards card might work well for you if you pay off your balances in full each month.
On This Page:
- How Rewards Credit Cards Work
- Types of Rewards Credit Cards
- How You Redeem Credit Card Rewards
- Who Might Benefit By Getting a Rewards Card?
- Dos and Don'ts of Using a Rewards Card
- How You Should Compare Rewards Credit Cards
- The Credit You Need to Qualify for a Rewards Card
- Other Questions You May Have About Rewards Cards
A rewards card can come with cash back, points or miles.
You typically need good to excellent credit to qualify for one.
Depending on the card, you may earn flat-rate or tiered rewards.
How Rewards Credit Cards Work
Rewards credit cards let you earn rewards every time you use them to make purchases. Balance transfers and cash advances don’t earn rewards. It is common for such cards to come with different reward structures. How you get to redeem your rewards depends on the card you get. While some cards offer limited options, others give you multiple ways to redeem your rewards.
To attract customers, most credit card providers offer spend-based welcome offers through which you get to earn bonus rewards. Some such cards offer time-based 0% APR offers too.
How Rewards Credit Cards Differ From Regular Credit Cards
A rewards credit card works in the same basic manner as a regular credit card, wherein it gives you access to a revolving line of credit. The main difference is that a rewards card lets you earn rewards in some form every time you use it to make a purchase. The best rewards credit cards include some that come with steep annual fees, whereas this is typically not the case with cards that don’t offer rewards. In addition, rewards credit cards tend to come with higher APRs than cards without rewards.
Flat Rate and Tiered Rewards
Rewards credit cards follow two basic reward rate structures — flat rate and tiered. With a flat-rate rewards card, the same rewards rate applies to all purchases. For example, the American Express Cash Magnet Card offers 1.5% cash back on all purchases. Cards with tiered rewards, on the other hand, offer higher reward rates on category-based spending. For instance, the Capital One SavorOne Rewards Card lets you earn 3% cash back at grocery stores and on dining, entertainment and popular streaming services. All other purchases earn 1% cash back.
Types of Rewards Credit Cards
Rewards credit cards come in different forms and tend to offer unique features and benefits. People who wish to keep their rewards earning simple may want to consider getting a flat-rate cash back card. If you, on the other hand, are a frequent flyer, you might benefit more by getting a co-branded rewards card.
Co-branded cards are ones that are associated with a particular airline, group of hotels or chain of big-box retail stores. These cards offer higher reward rates when you make purchases with the brand in question. Depending on the annual fee you’re prepared to pay, you may also be able to take advantage of various brand-specific benefits. However, you might have limited options when it comes to redeeming your rewards through a co-branded card. Such cards include the Amex Hilton Honors Card, the Chase Marriott Bonvoy Bold Card and the Citi AAdvantage Executive World Elite Mastercard.
A rewards credit card that is not linked to any particular brand other than its issuer qualifies as a non-co-branded card. These cards may offer flat-rate or tiered rewards. Getting a non-co-branded card typically gives you more ways to redeem your rewards when compared to a co-branded card. Some of the top rewards cards from this segment include the Chase Freedom Unlimited Card, the Citi Rewards+ Card and the Capital One Spark Cash Select Card for Business.
Cash Back Cards
As the name suggests, cash back cards let you earn rewards in the form of cash. Depending on the card, you may receive the cash back you earn as a statement credit, into a linked bank account or via a check. Cash back credit cards include those that come with flat rates on all purchases and those that offer high cash back on bonus categories.
Cards With Points
Rewards credit cards from this segment come with reward points. While you may find cards that offer flat reward rates, you’ll also come across ones that let you earn points faster when you spend on bonus categories. Unlike cash back rewards, the value of points does not translate into corresponding dollar values. The value of the points you earn depends on the rewards program you’re part of, as well as on how to choose to redeem your points.
Cards With Miles
Credit cards with miles are typically associated with a particular airline, although this is not always the case. These cards let you earn miles as rewards, which you may then redeem for flights and upgrades. Some of the top cards from this segment come with various airline/airport benefits, such as priority boarding or waiving the fee for your first checked bag, although these typically come with annual fees. Some of the top no-annual-fee cards with miles include the American Express Delta SkyMiles Blue Card, the Chase United Gateway Card, the Citi American Airlines AAdvantage MileUp Mastercard and the Capital One VentureOne Rewards Card.
Beware of rewards cards that have a cap on spending in certain bonus categories. Depending on how much you spend, you may be better off with a lower rate that offers unlimited rewards. -- Lee Huffman, credit card expert at BaldThoughts.com.
How You Redeem Credit Card Rewards
You need to wait for your reward points, miles or cash back to post to your account before you can spend them. Most card issuers post rewards within a few days of the statement closing date. Credit card providers and their co-brand partners typically operate dedicated websites to manage their reward programs, through which redeeming your rewards is usually straightforward.
Most credit card rewards don’t expire as long as your account remains active and in good standing, although a few card providers require that there be some activity on your account through the course of a year. In a few programs, your rewards will expire within a set period of time, whether there is activity on your account or not.
Determine the Value of Your Rewards
This is relatively easy when you use a cash back card. The value of the cash back you earn translates to an equivalent dollar amount. However, this is not the case with points or miles. In such cases, the value of your points may vary based on how you choose to redeem them. For example, if you wish to redeem reward miles for an air ticket, the value of the points may fluctuate depending on the route you wish to fly, the class of ticket you wish to book and your travel dates.
Ways to Redeem
How you are able to redeem your rewards depends on the card you get and the reward program in which you’re enrolled. Some of the more common options include getting a statement credit, getting the dollar value transferred to a linked bank account, paying for purchases through specific websites, getting gift cards, paying for travel-related purchases and making donations to charitable organizations. In some cases, you might have to wait for your rewards to reach a predetermined level before they can be redeemed.
Who Might Benefit By Getting a Rewards Card?
If you plan to pay off your balances in full every month, you may benefit by getting a rewards credit card. If not, the rewards you earn may fall well short of the interest charges you end up paying. Depending on spending patterns and other requirements, people from different walks of life may look at getting a rewards credit card.
Frequent travelers may benefit by getting travel rewards cards, be it in the form of a co-branded or non-co-branded card. The best cards from this segment offer higher reward rates on bonus categories and come with multiple airline/airport/hotel benefits.
If you’re a big spender, there’s more than one reason to get a rewards credit card. While earning rewards is a definite perk, the best cards for big spenders come with an assortment of premium features and benefits. These include, but are not limited to, membership status upgrades, airport lounge access, priority boarding, statement credits and sizable welcome bonuses.
Anyone making a large purchase
If you plan to make a large purchase in the near future, you may be able to bring its effective cost down by earning rewards. If you get a card with a spend-based welcome offer, you may also benefit from that.
Those who want to capitalize on everyday spending
People who spend money on everyday purchases can make the most of their spending by earning rewards. Besides, several cards offer higher-than-usual reward rates on bonus categories such as dining, groceries, gas stations, drugstores and travel.
If you’re a student who wishes to build credit, you may want to consider getting a student card that offers rewards. Responsible use of the card will help build your credit history, and you will earn rewards on every dollar you spend.
Dos and Don'ts of Using a Rewards Card
Using a rewards credit card comes with advantages, but you need to be aware of potential pitfalls too. For example, you might get carried away in the flow of earning rewards and end up in debt that you then find hard to repay.
- Examine your spending habits: The best rewards card is one that lets you make the most of your existing spending habits. For instance, if your regular expenses account for a noticeable sum going toward groceries, gas and eating out, you may consider getting a card that offers higher reward rates on these categories. In addition, take a look at how much you need to spend to earn a welcome bonus. While this might be $1,000 in three months with some cards, it could be $5,000 in three months with others.
- Use your new card to benefit through its welcome offer: Use your new rewards credit card to pay for everyday purchases and any large purchases to make sure you earn the welcome bonus. Then, pay the balance off in full before the next due date.
- Maximize the value of your rewards: The value of your rewards typically depends on the card you get and how you redeem them. For example, if you have a travel rewards card, you typically get the best value for your points/miles when you redeem them for airline or hotel bookings. With a cash back card, opting for a statement credit is usually the best way to go.
- Don't overspend: In the lure of earning rewards, don’t end up spending more than you can afford to pay in full each month. This is because the interest that accrues might wipe off any monetary benefit you get through rewards. In addition, racking up debt can have an adverse effect on your credit score.
- Don't pay a high annual fee if you can’t justify it: Don’t get a rewards credit card with a high annual fee if you cannot foresee earning enough rewards and making adequate use of its benefits.
- Don’t let your points expire: Depending on which card you get, your rewards may expire when your account is closed. In addition, your card provider may require that you make at least one purchase every 12, 18 or 24 months, failing which your rewards might expire. Rewards from airline and hotel co-branded cards transfer once the statement is closed. If you close your card, you won't lose miles or points that have already been transferred, but you will lose rewards from purchases made during that statement cycle.
How You Should Compare Rewards Credit Cards
There are significant differences in the top rewards cards. Selecting the right one requires that you pay attention to your spending patterns and a few other important aspects.
Determine if you might benefit more by getting a rewards card with a flat rewards rate or one that offers tiered rewards rates. In the latter case, look for cards with bonus categories that align with your everyday spending.
It is common for rewards cards to come with spend-based welcome offers. For instance, you may stand to earn $500 as cash back if you use your new card to spend at least $3,000 on purchases in the first three months.
Some rewards credit cards come with no annual fees, while others charge upward of $500 per year. As a result, select a card based on the features and benefits you’re after, but be sure to take into account whether those benefits will offset the fees you need to pay.
The better your creditworthiness, the better an APR you might get. However, APRs are not the same across all rewards cards. In general, rewards cards tend to come with higher APRs than cards with no rewards. Some rewards cards come with time-based 0% APR offers on purchases and balance transfers.
Foreign transaction fees
If you plan to use your rewards credit card outside the U.S., consider getting one with no foreign transaction fees. If you end up with a card that charges this fee, you’ll be charged up to 3% extra on each international transaction.
Card-specific features and benefits are far-ranging. Some include reward nights, discounts on in-flight purchases, airport lounge access, priority boarding, companion certificates, purchase protection, extended warranty, additional cards and travel insurance coverage.
The Credit You Need to Qualify for a Rewards Card
You typically need good to excellent credit to qualify for a good rewards credit card. It is common for credit card issuers to have their own guidelines on required credit scores. If you wish to get a card with premium benefits, you may qualify only if you have excellent credit. Some credit cards for fair credit also offer rewards, but these usually come with basic features and reward rates.
Other Questions You May Have About Rewards Cards
Going through answers to commonly asked questions about how rewards credit cards work will hold you in good stead when making a selection.
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