Best Rewards Credit Cards

Rewards Credit Cards: The Basics

Standard credit cards leave you with nothing but a bill that you’ll need to pay off. But rewards credit cards offer various perks just for paying with plastic. Some rewards credit cards come with a sign-up bonus that consumers can earn after spending a certain amount of money within a specific time frame. But generally, all rewards credit cards provide incentives to cardholders who make certain purchases or shop at certain retailers.

Rewards credit cards come in many different flavors. But the types of rewards that you can earn fall into three main buckets: points, travel miles and cash back. What’s the difference between the three types of credit card rewards? We’ll explain.

Using Rewards Credit Cards to Earn Points

If you have a credit card that allows you to earn points, you’ll rack up rewards over time that you can later redeem in a variety of ways. Your rewards card program may allow you to exchange your points for gift cards and special services. You may also be able to swap your points for merchandise through an online shopping mall.

Instead of signing up for a general rewards program that lets you apply your points almost anywhere, you could get a travel rewards credit card. Travel rewards cards are typically based on a system that gives you the chance to earn points that you can redeem for hotel stays, rental cars and flights.

The way a rewards program is set up may vary depending on the credit card issuer that manages it. But generally, when you have the opportunity to accumulate points, you’ll earn a point for spending a certain amount of money. For example, you may earn one point for every dollar you spend.

A single rewards program may structure the way it awards points differently based on the kinds of purchases that an individual makes. In other words, you may be able to earn two points for every dollar you spend at the gas station but three points for every dollar you spend at the grocery store. Or, you may earn a certain number of points dollar for dollar regardless of where you’re spending money.

Some of the best rewards credit cards let consumers earn transferable points. This means that if you earn points, you may be able to convert them to travel miles. Those kinds of programs give you a lot more flexibility when it comes to redeeming your rewards. You might also have the chance to redeem your rewards points as cash back.

Using Rewards Credit Cards to Earn Cash Back

Instead of points, some credit card issuers offer rewards in the form of cash back. When you purchase certain items, a percentage of what you spend may be given back to you as a cash reward. If you’re part of a cash back rewards program, you may be able to earn between 1% and 5% of what you spend on everyday purchases (but in most cases, you’ll only earn around 1% cash back). You may qualify for a higher percentage of cash back when you shop at certain places like gas stations and restaurants. Some rewards programs offer as much as 20% cash back.

Cash rewards can be deposited into a bank account or dispersed in the form of a check. Sometimes, you can withdraw your cash rewards whenever you want. But there are credit card issuers who only hand out cash rewards once per year. To find out how a specific rewards program works, you’ll need to review a credit card’s terms and conditions.

Sometimes the phrase “cash back” can be misleading. In fact, some cash back programs don’t give out cash at all. In these circumstances, cardholders with cash back cards receive points (rather than cash) that they can trade in for statement credits. Never heard of a statement credit before? It’s simply money that a credit card company or retailer can post to someone’s account, much like it would post a credit card charge or a refund. With statement credits, you don’t have the freedom to use your rewards during an emergency or whenever you need extra cash. But you can use a statement credit to pay off outstanding balances within your credit card account.

Using Rewards Credit Cards to Earn Miles

Airline miles are a third type of credit card reward. Certain credit cardholders can earn miles that they can eventually exchange for plane tickets.

Redeeming airline miles is similar to redeeming points. If you accumulate enough miles, you may qualify for a free trip or a flight that costs next to nothing. You may also be able to use your miles to pay for other travel expenses and get access to various benefits like buddy passes and complimentary upgrades to first class.

Usually, there are a few ways to earn miles. Airline miles might accumulate whenever you use your credit card to make everyday purchases. With some types of cards, for example, you’ll earn one mile for every dollar you spend using your credit card. You may be able to earn extra miles by finding a card with a sign-up bonus (that gives you additional miles for spending a certain amount of money within a few months of opening your account).

Miles can also add up whenever you book a flight. This means that the more you travel, the more miles you’ll have. But some of the savviest frequent flyers earn the majority of their airline miles without setting foot on an airplane. In some cases, you can earn miles by filling out a survey or opening a new bank account or investment account. You can also earn miles through special rewards programs such as airline dining programs.

Another way to get airline miles is to transfer your credit card points to miles. But if you’re interested in doing that, you’ll need to pay attention to the conversion rate. One point is often equal to one mile. But you may be able to earn bonus miles for transferring a certain number of points.

Types of Reward Credit Cards Available to Consumers

There are many different kinds of rewards credit cards. Besides credit cards that offer points and cash back credit cards, there are co-branded credit cards that give you extra points and other perks for purchasing products offered by the retailer, airline or the hotel that sponsors your credit card. You can also apply for a gas credit card.

With a gas credit card, you’ll earn rewards every time you pay at the pump or whenever you buy gas from a particular company. Many of those cards are cash back or rebate cards. Best of all, they may allow you to earn cash back every time you use your card. So you may earn 1% cash back on standard, daily purchases and as much as 10% cash back (perhaps during a short introductory period) when you stop by the gas station.

Two other types of rewards credit cards are general travel rewards credit cards and airline miles credit cards. With a general travel rewards card, you’ll be able to earn miles or points that you can redeem through multiple airlines or trade in for gift cards and merchandise. You may also be able to exchange your miles for statement credits that cover the cost of just about any travel expense, including hotel stays, cruises and car rentals. In contrast, an airline credit card will limit your ability to earn and redeem rewards. Generally, these kinds of rewards cards are tied to frequent flyer programs and the only way to rack up rewards is to spend money with a particular airline.

The Benefits of Rewards Credit Cards

Rewards credit card offer all sorts of perks. With an airline credit card, for example, you can take advantage of things like priority boarding, seat upgrades and companion passes for your friends and family members. Some airline credit cards make it possible to get to the elite status level more quickly. With elite status, travelers get exclusive rewards such as lounge access and same-day flight changes.

Some of the best rewards credit cards let consumers redeem their points for tickets to concerts and sporting events and discounted admission to theme parks and spas. In the process of earning rewards, you can save money on gifts and day-to-day expenses. Through some programs, you can also donate your rewards to your favorite charity.

Cardholders can invest their credit card rewards, too. Certain programs will allow you to take the rewards you earn and put them in an investment account.

How a Rewards Credit Card Could Save You Money

A rewards credit card can save you money in many different ways. Instead of using all of your hard-earned dollars to pay your monthly bills, you could use the cash back you earn to make your student loan, car loan and mortgage payments. The earnings you would’ve put toward your debt payments can then be used for other purposes. You could also invest your cash rewards and potentially earn more money. As you can see, a cash back credit card can essentially serve as an additional source of income.

Travel fees and costs can quickly add up. But you may be able to use an airline credit card to avoid paying baggage fees and score discounts on the flights you purchase with your miles. With just one or two rewards cards, you could earn thousands of points that you could redeem for cheap tickets to distant lands. That’s not something you can do when you pay with cash. Even the best debit card rewards programs are no match for the rewards programs tied to credit cards.

But you don’t have to travel in order to make the most of a rewards credit card. You can use a rewards credit card to cut costs on a daily basis. Different credit cards offer deals on dining, entertainment, gasoline and health-related expenses.

The Drawbacks of Rewards Credit Cards

A rewards credit card may sound perfect for anyone who’s trying to save on travel or earn cash that they can use to pay off debt. But there’s often a catch. A free flight that you trade in for your airline miles won’t be completely fee since you’ll probably have to pay fees and taxes.

In exchange for using a rewards credit card, you may have to pay extra fees (like an annual fee). You may also get stuck with a high annual percentage rate. This often happens with rewards cards that offer cash back. That’s because cash rewards can be a major expense for credit card issuers.

If you’re applying for a credit card with points, miles or cash back, note that your rewards program could change at any moment. That’s why reading your credit card statements and terms carefully is important.

What’s more, rewards can expire or disappear if you fail to use your credit card in a responsible manner. If you don’t use all of your points within a set time period, you may have to forfeit the rewards you worked so hard to earn. If you can’t keep up with your monthly credit card payments, you may have to kiss your credit card rewards goodbye. And if you close your credit card account before redeeming all of your rewards, you may lose access to them.

You can also come across issues when you’re trying to redeem your rewards. For instance, your ability to exchange your airline miles for plane tickets may be restricted by blackout dates (or days when you’re not allowed to redeem your rewards). These dates normally fall around busy travel periods like major holidays. If you’re a frequent flyer, there may be a limited number of plane seats available to you on any given day.

With so many rules and regulations attached to credit card rewards programs, it’s easy to make mistakes. For example, you may not realize that a statement credit cannot be used to cover a minimum credit card payment (in most cases) until you’re hit with a late payment fee. Furthermore, you may decide to stop using a cash back credit card altogether only to realize later that in order to redeem your statement credits, you must continue making purchases with your card.

How Rewards Credit Cards Can Affect Your Credit Score

Anytime you apply for new credit – whether it’s a student loan, a mortgage or a rewards credit card – your credit score will fall. But this change won’t be permanent. In no time, you should be able to raise your credit score by paying your credit card bills on time and keeping your credit utilization ratio low, among other things.

Your credit utilization ratio (or your debt-to-credit ratio) is the amount of credit you’ve used relative to the total amount of credit that’s available to you. Generally, experts say that it’s best to keep your debt-to-credit ratio below 30%. Most lenders refer to FICO credit scores. That scoring model says that 30% of your credit score will depend on your credit utilization ratio and the amount of debt you haven’t paid off.

Just having a rewards credit card won’t help or hurt your credit score in any way. What happens to your credit ultimately depends on how you use your credit card. If you’re juggling multiple rewards card accounts at one time, keeping track of your payment due dates and how much you owe on each card can be tricky. If you can’t stay organized and you miss a payment deadline, your credit score could drop. After all, your payment history accounts for 35% of your FICO credit score.

Perhaps you have a total credit line of $10,000 across three of your credit cards and a total balance of $2,800. Your credit utilization ratio is 28% ($2,800/$10,000). If you close a rewards credit card with a $3,000 balance, your credit utilization ratio will climb to 40% ($2,800/$7,000). If that happens, you’ll need to be prepared for your credit score to dip.

Who Should Apply for a Rewards Credit Card?

Want one of the best rewards credit cards? You’ll need to have a good credit score. That means your score should be around 700. But if you have bad credit, you may not be eligible for a rewards credit card. After all, if you’re a risky borrower with a higher chance of defaulting on your credit card debt, it doesn’t make sense to give you access to rewards in the first place.

Rewards credit cards are also best for folks who normally refrain from carrying a balance from month to month (meaning that you usually pay your credit card bill in full). That’s because rewards credit cards typically have extra fees and/or high interest rates. The easiest way to make the most of your rewards is to ensure that you’re not spending a ton of money on interest. If you can avoid paying interest altogether, you can save money and use your credit card rewards to cover the cost of other bills and debts.

Detail-oriented folks are also good candidates for rewards credit cards. In addition to credit card payment due dates, you’ll have to keep up with minimum spending requirements and credit limits. You’ll need to be well-versed on the rules related to the redemption of your rewards, too.

How to Evaluate Rewards Credit Card Offers

If you’re looking for the best rewards credit card, you’ll need to shop around and review the terms and conditions that apply to different cards. You’ll need to find out as much as possible about the way a credit card rewards program is structured before signing up.

Will you be able to redeem the rewards from your cash back credit card as cash or statement credits? Can you earn more rewards by using a certain credit card at a particular store or retailer? Will the rewards expire? Asking these kinds of questions is important if you’re trying to find a rewards credit card that meets your needs.

Something else to focus on is the cost of signing up for a particular credit card. We’re talking about fees. If you don’t want to pay a premium for having a rewards credit card, it’s best to look for a credit card without an annual fee and an annual percentage rate that’s on the lower end of the spectrum. As of April 2017, the average APR for a rewards credit card is 15.79%. Annual percentage rates for cash back and airline miles credit cards are around 15.76% and 15.73%, respectively.

In some situations, signing up for a rewards card with a high annual fee may be worth it. High annual fees are normally an indication of an opportunity to earn more rewards. But if you can’t afford to spend enough money (and earn enough rewards) to compensate for the higher fees, you’re probably better off with a low-fee rewards credit card.

As you’re comparing rewards cards, don’t forget to consider your approval odds. Your credit score is one factor that affects your chances of qualifying for a particular credit card. If your credit score is significantly lower than the recommended range for credit card applicants, you may want to look at a different set of rewards cards.

The process for evaluating credit card offers will differ depending on whether your rewards credit card offers cash back, miles or points. For instance, if you’re comparing rewards cards that allow you to earn airline miles, it might be helpful to find out how many miles you’ll need in order to be eligible for a free flight. And if you’re looking for a cash back credit card, it’s best to pick one that offers as much money as possible and rewards you with cash rather than a statement credit.

An additional factor to consider is whether a rewards credit card offers other benefits (besides the cash back, miles or points) that appeal to you. For example, baggage fee waivers may be helpful to frequent travelers looking for ways to cut back on their expenses.

What Matters Most When Applying for a Rewards Credit Card

Your spending habits should play a big role in determining which rewards credit card is best for you. Calculating how much you spend on groceries, travel, gasoline and goods from certain retailers is a great step to take before choosing a rewards credit card. If you spend a large portion of your income on groceries, getting a credit card that rewards you for shopping at the supermarket might make sense. And if you tend to spend a lot of money at a single retailer, getting a co-branded credit card that rewards you for shopping could be a good idea.

How easily you’ll be able to earn and redeem rewards and the value of those rewards also matters. The best rewards credit cards make it easy to double dip and earn twice as many rewards at one time. If you’re strategic, you may be able to use your credit card to earn three or four times as many rewards. On the other hand, if accruing and redeeming rewards is going to be a hassle or you’ll only be able to use them within a short period of time, putting effort into earning those rewards could be a waste of time.

Fees and interest rates are two other key factors for consumers. In order for a rewards credit card to be valuable, your rewards must exceed your borrowing costs. The best rewards credit cards have no annual fees and an introductory 0% APR on balance transfers and regular purchases.

Finally, your ability to get approved for a rewards card should matter if you’re trying to decide whether you should apply for one. Even if you have a high credit score, your request for new credit could be denied if you’ve recently applied for multiple loans or lines of credit.

Should You Choose Points, Miles or Cash Back?

If you’re torn between choosing a rewards credit card that offers miles versus one that provides cash back or points, you’ll need to think about your interests, goals and priorities. For example, a card that offers cash back could be a good fit for anyone looking for a simple and straightforward way to earn rewards. Unlike a travel credit card, a cash back credit card may give you the chance to apply your rewards to all kinds of purchases (like groceries, rent payments and trips to the gas station), not just travel-related transactions.

Of course, a travel rewards credit card can give you more bang for your buck, especially if you travel on a regular basis for work or you take multiple vacations throughout the year. If you don’t care which airline you use (because you simply want the cheapest flights you can find), you may want to sign up for a general travel rewards credit card. But if you mainly book flights with a specific airline, you may want to consider applying for an airline credit card and joining a frequent flyer program.

You’ll also need to keep in mind that accumulating and redeeming airline miles and points will require more leg work than earning and using cash rewards. If you’re not interested in figuring out the best way to apply your points and miles, you may want to get a cash back rewards card instead.

What’s more, travel rewards cards aren’t ideal for every traveler. Travel rewards won’t be very valuable for individuals who don’t have flexible schedules, those who tend to travel in large groups and those who only fly during peak travel times. If you have a tough time redeeming your miles or points for travel, you might not be able to use them at all.

Assessing the Value of Credit Card Rewards

Knowing how much credit card rewards are actually worth is important, particularly when you’re trying to pick the best rewards credit card. Using a simple formula, you can calculate the value of each credit card reward and determine the best way to redeem them. All you need to do is look at the number of points or miles needed to earn a certain reward and divide that amount by its value (in dollars).

Let’s look at an example. Let’s say that in order to get $5 cash back you need 500 points. This means that one point is worth $0.01 ($5/500). The greater the value of your rewards, the better. You can use the same formula to determine the value of all of your credit card rewards. While you’re at it, you might want to try and estimate the value of the other perks associated with a credit card (like rental insurance) based on how much money they could help you save.

Of course, figuring out how much your rewards are worth can be tricky. In terms of points, the true value of your rewards can vary depending on how you redeem them. Theoretically, your hotel points could be worth about three cents if you were to redeem 24,000 points for an $800 hotel room ($800/24,000). But if you’re only spending $200 on a hotel room and using just 10,000 points, each point would only be worth two cents ($200/10,000).

To calculate the value of your airline miles, you would have to consider your redemption options, the kinds of seats available (if you’re redeeming your miles for plane tickets) and where you’re traveling. Often, the seats that you can claim with the fewest number of miles are hard to come by and have the lowest real value.

The value of cash rewards tends to remain fairly stable over time. With miles and points, however, the value of those rewards can decrease over time as credit card issuers make adjustments to their redemption policies. But cash rewards may be worth less than miles and points. A single reward is typically worth 1 cent. Points and miles, however (particularly when redeemed as travel rewards), can be worth 3 to 5 cents per reward.

But the value of rewards can vary. Outside of earning points for travel, cash rewards can be worth just as much as points redeemed for merchandise.

As you’re comparing credit card offers, it’s important to pay attention to whether points and miles are worth a flat rate or have tiered reward rates. With a flat reward rate, you’ll earn a specific number of rewards for every dollar you spend. But if your credit card has a tiered rewards system, you’ll earn more rewards with certain purchases or after spending a certain amount of money. For example, you might earn 2% cash back once you spend $3,000. Until then, you may only earn 1.5% cash back.

What to Do After Choosing a Rewards Credit Card

Once you’ve picked a rewards credit card that you like, you’ll need to apply for it. You may be instantly approved for a card within minutes. Or you may have to wait a couple of weeks to find out whether you’re approved (particularly if you mailed in a credit card application). Receiving your rewards credit card in the mail could take between seven and 10 business days.

As soon as your rewards credit card appears in your mailbox, it’s a good idea to activate it and thoroughly read over the fine print. If you have any questions about earning or redeeming rewards, you can contact a representative from the company that manages your credit card account.

If applying for another rewards card leaves you with too many credit cards, you may be tempted to close one of your old accounts (especially if the new card offers better rewards). But you’ll need to think about how that’ll impact your credit score. Getting rid of an account could raise your overall credit utilization ratio and make it look like you’re using a high percentage of your total credit line. Since your credit utilization ratio accounts for 30% of your FICO credit score, your score could plummet.

But what if you need to close a credit card account because you’re tired of wasting money on a card with a high annual percentage rate or high fees? You might want to close one of your newer credit card accounts. That’ll have less of an effect on the average age of your credit history (which accounts for 15% of your FICO credit score). If you’ve decided to go ahead and close an account, you’ll need to pay that balance in full and redeem all of your credit card rewards (or run the risk of losing them).

How to Earn as Many Rewards as Possible

To earn as many rewards as you possible can, you’ll need to have a firm understanding of how your rewards program works. If you have a gas credit card, for instance, your strategy for earning plenty of cash rewards may involve using your credit card every time you make a trip to the gas station. If you applied for a credit card with a sign-up bonus, you’ll probably have around 90 days to spend enough money to get the bonus.

Meeting a minimum spending requirement is easier than you think it is. You can qualify for a sign-up bonus by purchasing gift cards and getting a head start on your holiday shopping. Just make sure you do most of your shopping through your card’s online portal. With your credit card’s bonus mall, you can earn extra rewards and work toward hitting your spending goal at the same time. Using your credit card to make charitable donations and paying bills with your credit card are a couple of additional tactics that can help you work toward earning a sign-up bonus and additional rewards.

If you want to earn as many rewards as possible, you’ll need to figure out whether you can double, triple or quadruple dip. Can you earn twice as many rewards by earning points for using your credit card and getting extra points for dining at a particular restaurant? Can you earn three times as many points by booking a flight, purchasing your ticket through a website that offers its own rewards program (like Expedia) and using a credit card that awards points to people who book through Expedia?

Crunching some numbers should help you determine the value of your rewards and the best way to redeem them. And it doesn’t hurt to read up on how other people with your credit card have earned rewards in the past.

Redeeming Your Credit Card Rewards

The process of redeeming credit card rewards can be complicated. Cardholders often have to abide by various rules when they want to cash in on the benefits they’ve earned. For example, consumers with cash back rewards cards can normally only redeem certain amounts of rewards at one time. And under some programs, you have to spend a certain amount of money before you can redeem your cash rewards.

Many rewards credit cards have online bonus malls. Through these portals, you can use points to buy products. You can also use your credit card to purchase merchandise and gain cash back and/or additional points. In many cases, you can use the points you’ve earned to pay for part of a good or service and use your rewards card to pay for the rest. Cardholders can access their credit card bonus malls by logging into their accounts.

Loyalty programs make it easy to redeem rewards for gift cards, travel and other items. If you’re a member of program that has a partnership with another company, you’ll have multiple ways to earn and redeem your miles and points.

Consumers who want to redeem their airline miles for plane tickets may have to do so by calling a travel agent or airline directly. Or you can apply your miles to a flight online through an airline’s website using your account number. As you’re going through the process of redeeming your miles, you’ll need to pay close attention to the awards chart that shows you the number of miles you need for a trip. Some of the best ways to use travel rewards involves using them to book expensive flights to foreign countries and stays at high-end hotels.

Frequently Asked Questions:

Final Thoughts

Rewards credit cards give consumers the chance to earn miles, points or cash back that they can trade in for gift cards, merchandise and other perks. Whether you’re trying to score a free flight to Maui or ditch your mortgage debt, credit card rewards can make it easier to reach your personal and financial goals.

Before applying for one of the best rewards credit cards, it’s best to consider whether you can afford to take on more credit card debt. You may want to avoid getting another credit card if you’re struggling to keep up with bills and you have no room in your budget for additional fees and charges.

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