What Is a Rewards Credit Card?
Rewards credit cards offer you some type of "reward"—typically cash back, points, or travel miles—for every dollar you spend, sometimes up to certain limits. Depending on the card, you can then use your rewards in a variety of ways.
- Rewards credit cards typically offer cash back, points, or travel miles for every dollar you spend.
- Rewards cards make the most sense for consumers who pay their balance in full each month. Otherwise, the interest charges could easily exceed your rewards.
- The best rewards card for you will depend on your everyday spending habits and how you plan to redeem your rewards.
How Rewards Credit Cards Work
Rewards cards represent a large portion of the credit card market today, and they seem to offer something for everyone. In addition to different rewards structures, the cards vary in terms of how your rewards can be redeemed and what kinds of things they may be redeemed for.
Typically, you can redeem your rewards for checks, statement credit, merchandise purchased through the card company, gift cards, and/or travel perks. At the end of each billing cycle, you can see your current rewards balance on your credit card statement.
Many credit card companies also offer introductory bonus rewards to try to entice you to sign up. Those offers may involve hundreds of dollars in incentives once you reach a certain spending threshold, along with an introductory 0% APR for the first several months, and no fees for the first year.
How to Compare Rewards Credit Cards
If you're shopping for a rewards credit card, here are some of the important features to consider.
- Annual fees. Not all rewards credit cards have annual fees, but a lot of the more lucrative ones do. So before you sign up, it’s important to weigh the cost of any annual fee against the value of the rewards you expect to collect over the course of the year. Paying an annual fee of several hundred dollars, as some high-end cards charge, could easily offset your rewards unless you're a big spender.
- Interest rates. Many rewards cards offer a promotional 0% APR for the first year. But after that, unless you pay your balance in full each month, you'll be subject to interest charges. Interest rates on rewards cards can be steep—often 15% to 20% or higher—and they can add up quickly if you keep running a balance. So, like a stiff annual fee, interest charges can outweigh any rewards you earn from your card.
- Tiered vs. fixed rewards. Some cards have tiered rewards structures, while others are fixed. Tiered cards offer different levels of rewards for different kinds of purchases. For example, a tiered card might offer 3 points for every dollar you spend on gasoline, but only 1 point per dollar on groceries. Fixed cards, on the other hand, pay the same level of rewards regardless of where you use them. For example, a fixed rewards card might offer 1% or 1.5% cash back on all purchases.
- Cash back spending caps. Many of the cards that offer cash back rewards put caps on how much you can earn in their most lucrative spending categories. For example, a card might pay 3% cash back on the first $1,500 you spend on groceries each quarter, but just 1% on any additional spending in that category until the next quarter begins.
A good rewards credit card will mesh with your everyday spending habits—not force you to change them or to overspend just for the sake of rewards.
How to Find the Best Rewards Credit Card for You
No rewards card, no matter how generous it may seem, is right for everyone. A lot depends on your particular siutation. So before you start applying, it's worth taking a couple of additional steps.
1. Analyze your spending habits
The best rewards card for you will be one that takes advantage of your usual spending habits—without forcing you to change your habits just to chase rewards. For example, do you spend a lot of money each month on gasoline, on groceries, or on restaurant dining? If so, a card that provides extra rewards in those categories could be the best match for you.
Are you an avid traveler? If that case, a card that rewards travel purchases—and that allows you to redeem your rewards for further travel—might be your best choice. Similarly, if you buy most of your clothing or household goods at a particular retailer, or frequent a particular hotel chain, a co-branded rewards card issued in conjunction with that company might make sense.
Also consider how much you spend overall. A card that requires you to spend $15,000 within the first three months in order to earn a big introductory bonus will be of little use to you if you only spend $1,000 or $2,000 a month on your credit cards. (Worse, it could encourage you to overspend!) In that case, look for a card with a lower spending threshold and, most likely, a smaller introductory bonus.
2. Check your credit score
You’ll need a good credit score to qualify for a good rewards card. According to Experian, one of the three major national credit reporting agencies, it typically takes a credit score of at least 670 in order to qualify for a rewards card. (For people with lower scores, a secured credit card could be an option. Some of them now have rewards programs, as well.)
So before you apply for a rewards card, take a look at your credit score and bear in mind that the cards with better benefits and higher spending limits may be out of reach if you have a limited or less-than-good credit history. What's more, applying for too many credit cards can itself hurt your score.
The Bottom Line
There are lots of rewards cards out there, but finding the right one for you can take a bit of research. If you'd like some help, Investopedia publishes frequently updated lists of the best rewards credit cards for particular types of users. Bear in mind, too, that you might want more than one rewards card. By mixing and matching travel, points, and cash back cards, you can find a combination that gives you the maximum benefit from all of your spending.