What Is a Rewards Credit Card?

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.

• 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

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.

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.

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. Cash back is received as Reward Dollars, which can be redeemed as a statement credit or at Amazon.com checkout. Cards with tiered rewards, on the other hand, offer higher reward rates on category-based spending. For instance, the Capital One SavorOne Cash Rewards Credit 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.

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 Marriott Bonvoy Bold® Credit 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 - $500 Cash Bonus Card for Business.

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.

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.

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 Delta SkyMiles® Blue American Express Card, the United Gateway Card, the American Airlines AAdvantage MileUp℠ Card and the Capital One Venture Rewards Credit.

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.

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.

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.

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.

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.

Going through answers to commonly asked questions about how rewards credit cards work will hold you in good stead when making a selection.

For rates and fees of the American Express Cash Magnet® Card, please click here.