The beginners guide to rewards credit cards
December 18, 2019
Rewards cards help you get more out of your everyday purchases. They can be redeemed for travel, products from your favorite store or cash in your wallet. Plus, they have the ability to revolutionize how you view your spending. While there are some aspects that can trip up any cardholder, the key is having the right card for you paired with the right card habits.
The ingredients of a rewards card
The three most typical types of rewards cards are cash back, points and miles. You earn rewards as you make purchases with your credit card. In most cases, you need to pay off your balance to earn the rewards. Making your payments on time each month and keeping a low (or no) balance can also do wonders for your credit score.
For cash back cards, you usually get to redeem your rewards through a statement credit, meaning you won’t owe as much on your next credit card bill. When accumulated in the form of points, you can redeem your rewards by shopping online. Oftentimes, the credit card company has its own marketplace or pre-determined relationships with certain retailers. You may also be able to purchase gift cards with your points.
Travel rewards cards let you redeem your points in a couple of different ways, depending on your individual program. You can either trade in your points for airline miles or hotel stays, or you can use them to directly book travel.
When analyzing travel points, particularly if you earn miles through your card, you’ll need to understand the conversion rates between dollars spent and miles earned. One mile equates to roughly one to 1.5-cents. It’s wise to compare values of a few different cards before making a decision. Also, note that the value of your airline miles varies depending on the airline chosen, destination (domestic or international) and whether you want to fly coach, business or first-class.
The rewards card rollercoaster
- Earn rewards for spending
- Enjoy bigger discounts on travel or shopping
- Receive extra travel perks
A rewards card adds an element of saving when you spend by helping you earn more points, cash or miles to use towards future expenses. When it comes time to redeem, you can often take advantage of discounts on your purchases or even qualify for extra perks like access to an exclusive airline lounge or a hotel room upgrade.
- Good credit is required to qualify
- May have an annual fee
- APR could be higher
Not everyone automatically qualifies for a rewards card. If your credit score does qualify you for a good card, you’ll need to be aware of hidden costs, such as an annual fee or a more expensive APR.
Vetting your credit card rewards program
In order to find the best credit card rewards program for you, first think about the type of rewards you want to earn. Once you’ve narrowed down the field, start exploring individual issuers to compare your options. Some rewards programs, for example, partner with specific airlines and hotels to increase your earning potential. If you love flying Southwest Airlines, consider a card like the Chase Southwest Rapid Rewards Premier Credit Card, which earns two points for every dollar spent.
Also, consider whether a card comes with an annual fee and whether or not this extra expense is worth it. Ideally, the value of any rewards you accumulate should exceed the annual fee. Some rewards programs waive the fee for the first year, giving you time to decide if it’s worth the cost of continuing with the program.
Using your rewards card to its full potential
Once you’ve chosen the right card, you’ll want to maximize its benefits. Start by charging your everyday expenses and then pay off the entire balance before the statement is due in order to avoid paying interest. Consider making payments each week so that you keep your spending in check. Also, take advantage of any signup bonus. Oftentimes, you can get a large amount of cash or even a free flight right away. Typically, you need to charge and repay a certain amount using the new card within a designated time frame in order to qualify.
Maximizing your rewards also means being strategic with your spending. Many rewards credit cards have rotating quarterly categories that earn you a higher percentage of cash back. Others offer an ongoing higher percentage for certain purchases. For example, Blue Cash Preferred from American ExpressⓇ gives you 6% cash back on streaming service subscriptions and 3% cash back on transit categories like Uber or subway rides.
Final note before you earn
Taking full advantage of your rewards card is much like building your credit. It may start off slowly, but once you understand how the process works and what positive habits make the most impact, you’ll really start to reap the benefits. When you get your first rewards card, keep your activity manageable so you can track your spending, then continue to grow as you set a solid foundation for earning rewards.