Rewards credit cards come in several different types – ones that earn airline miles, hotel points, flexible bank points and cash back. Knowing the differences between these types of rewards cards can help you choose the one that will enable you to maximize the value of your rewards.
Because of that, these companies want to give you a reason to use their card instead of a card from another bank. For that reason, many credit cards offer incentives for you to spend money on that card.
These rewards come in a variety of forms – airline miles, cash back, bank points and others. Deciding what credit card to use can depend on a variety of factors, including what types of rewards you’re looking to earn.
What are rewards cards?
Rewards cards are a subset of credit cards that offer rewards for using the card when purchasing from merchants. Not all credit cards offer rewards, although many do.
Many rewards cards offer sign-up bonuses, which can be worth hundreds of dollars. Carefully signing up for, using and managing rewards cards can be a big boon to your overall financial health, but you need to be careful.
Before you sign up for a credit card, make sure that you have the financial ability and discipline to pay off your bill in full, each and every month. If you don’t, then you may be charged interest and late fees which will often more than eat up any rewards that you might earn.
See related: How to maximize credit card rewards
These cards offer sign-up bonuses and let you earn points that can be used for a variety of purposes. Because of this, these types of cards are often called “flexible” points cards. That’s because the points you earn are flexible in how you can choose to redeem them.
For example, the Chase Sapphire Preferred card earns Chase Ultimate Rewards points. Ultimate Rewards can be redeemed for travel at a rate of 1 to 1.5 cents per point (depending on which Chase credit cards you have). You can use them to pay yourself back for purchases that you make in a variety of different categories and you can also transfer your points to one of Chase’s hotel or airline transfer partners. This flexibility is one of the reasons that these types of rewards cards are so valuable.
These cards allow you to earn miles directly in the loyalty program of one particular airline (such as Southwest Rapid Rewards or American Airlines AAdvantage). You’ll then use those airline miles to book award flights directly through that program. If you are savvy with the award charts of your airline, you can often find some amazing deals by using miles, especially in premium cabins. On the other hand, it can be frustrating since you can only use your miles in one program, and, if the dates or prices don’t work out, you don’t have many other options.
Another type of similar card is one that earns hotel points. While they aren’t miles per se, cards like the Hilton Honors American Express Card or the World of Hyatt Credit Card work in a similar way. You earn points that can only be used with that particular hotel chain. While you can often find great deals on hotels when using points instead of cash, your hotel points are less flexible than other types of points.
Both cards that earn airline miles and hotel points often also offer perks if you are traveling with them. With airline credit cards, these could include things like increased access to award availability, free checked bags or priority boarding.
Many hotel credit cards offer access to room upgrades, complimentary annual nights or reduced award costs. Many airline and hotel credit cards also have a way to help you get elite status within that particular loyalty program.
Cash back cards
Cash back credit cards are another type of rewards card that is attractive to people who aren’t as interested in travel rewards. Two examples of cash back credit cards are the Bank of America® Unlimited Cash Rewards credit card and the Citi® Double Cash Card.
Cash back cards are usually not associated with any particular program – instead, you earn cash back that can usually be redeemed either as a check mailed to you or a statement credit directly on your card account.
Cash back credit cards are a good fit for someone who isn’t looking to earn airline miles or hotel points. You can just take the cash back and use that toward everyday spending or any purpose you choose.
Some cash back credit cards earn a fixed percentage of cash back on all purchases, which is a nice feature if you’re trying to keep things simple. Even if you choose to have other rewards credit cards, it is good to have a cash back credit card that earns at least 2% on all purchases. That way, if you’re not trying to meet a sign-up bonus or spending in a particular bonus category, you can use that 2% cash back card as a fallback to at least earn a minimum amount on all your purchases.
See related: Cash back credit cards: How do they work?
Who are rewards cards good for?
Rewards cards are typically great for someone who always pays bills on time and isn’t tempted to overspend just to grab a few extra rewards points.
The rewards that you get from credit cards can also get a bit complicated if you’re intent on maximizing earning potential and redemption value – especially if you end up with multiple credit cards earning different types of miles, points or cash back.
If you’re an organized person or enjoy juggling cards and matching spending to a particular card, then rewards cards might be for you. If you have multiple cards, make sure you keep track of how many points you have in different points ecosystems so you don’t lose out on any rewards value simply because you forgot.
Who shouldn’t get a rewards card?
Rewards cards aren’t for everyone – if you don’t use credit cards responsibly, you can wind up in some serious financial trouble. Before you sign up for a new rewards credit card, you’ll want to make sure that you can pay your monthly credit card bill in full every month. If you miss a payment or don’t pay the full amount, you will be charged a late fee or interest. These fees can quickly eat up the value of any rewards you might have earned.
If you’re not the most organized person, you might be better off just sticking with one debit card or credit card and putting all your spending on it. Even missing one monthly payment or overspending can be a big financial hit due to late fees and interest. Also, some people tend to spend more when they use a credit card compared to when they use cash or debit. If you feel like that describes you, you may be better off not worrying about credit card rewards.
Getting started with a rewards card
If you want to get started with a rewards card, the first thing that you’ll want to do is either have good credit already or make a plan to improve your credit score. While you can get some rewards cards with fair credit, most of the truly valuable rewards credit cards require good or excellent credit.
As we’ve discussed before, make sure that you have a stable financial situation where you are confident that you can pay off your credit card in full each billing cycle.
Once you have your basic financial situation in a good spot, start slow with just one new rewards credit card. If you’re not sure which credit card makes the most sense for you, you can look at a tool like CardMatch.
You get a lot of the value of rewards credit cards from the initial sign-up bonus, but it’s important to remember that maximizing your credit card rewards is more of a marathon than a sprint. Start with one credit card, then consider pairing cards. Many cards’ rewards value gets even better when you combine them with another card. Sign up for additional cards as you feel comfortable, and you will be well on your way to maximizing your credit card rewards.