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Updated: November 11, 2017
Rewards programs are great for maximizing the value of your spending in a way that best suits your lifestyle. Rewards cards come in a variety of types, all with their own advantages. Whether you want cash back or a travel card with a strong brand, a business card or a great general product, rewards cards offer excellent benefits, including points or miles, cash back, access to airport lounges, shopping portals and more.
Unsure where to start? We’ll walk you through the types of rewards cards, what makes them so awesome and potential drawbacks – none of which are insurmountable.
You can also check out our rewards credit card reviews to get a more detailed look at what each card has to offer. Here's what you need to know:
A rewards credit card is a product that gives you financial benefits for card loyalty. They often have signup bonuses and offer points or miles back for spending on certain types of purchases.
A rewards card is sometimes called a cashback card or a travel card, depending on the benefits offered.
With a cashback card, you can use it and forget it, earning a percentage back with every purchase. With a travel card, you can earn benefits for loyalty to airline or hotel brands.
Many rewards cards have an annual fee, which is not necessarily a bad thing (more on that later), and they frequently offer a signup bonus that you get for spending a certain amount within a certain period of time, usually 90 days or 3 months.
Rewards cards can come both as consumer or business cards, which can have rich benefits.
A rewards card can be used not only for convenience, but as a way to earn cash back or enjoy benefits from travel points. In fact, used correctly, you can get hundreds of dollars back a year, even after an annual fee.
The trick is to make sure you don’t carry a balance and that you use it enough to make it worth your while.
You want to avoid carrying a balance, because otherwise, you undo any benefits the card offers you. So, if you use your rewards card to buy $500 in clothes, and you get 2X points back for your spending, you'll get $10 back. Easy money, right? But then, if you pay the minimum each month on the $500 at a rate of 17% APR, it will take you 24 months and you will pay $92 in interest charges. So, instead of making $10, you spent more than $80 you could have used on groceries or other expenses.
You also want to make sure you spend enough (without incurring debt) to get the full benefit of the card.
For example, after your first year with the Chase Sapphire Preferred, you'll pay a $95 annual fee. If you spend $4,000 on dining for the year, that comes to 8,000 points, because travel and dining at restaurants worldwide get you 2X points for every dollar. If you use those 8,000 points in the Chase Ultimate Rewards portal on travel, they become $100 in redemption, more than covering the annual fee.
If you plan to spend less than $4,000 on dining and travel, the card isn't worth it for you, because you will not have cleared the annual fee hurdle, assuming you do no other spending.
So, think about how you'll use your rewards card before applying.
When you apply for a rewards credit card, the card issuer will gather some information, including Social Security number, name and address, and income. Fill out the form honestly, because you can have the card revoked if you’re caught in a lie. Income can be money you have access to, rather than just your salary, so if you and your spouse are employed, you can combine the incomes. This is helpful if you are an at-home parent and the family has just one income.
Many cards will approve or decline you within minutes. If you are approved, you may be able to shop online immediately. Your card will arrive within a few days in the mail.
Rewards on a credit card can work as cash back, statement credit or through a portal, and can be used for redemption in travel or shopping.
Say you take out a Barclaycard Arrival Plus. You'll get 50,000 miles after a $3,000 spend in the first 3 months of card membership, which turns into $500 in travel. Here's how it works: Once you make a travel purchase with the Arrival Plus, you'll choose your redemption through a travel portal and get a statement credit. Your rewards don't expire, but you have 120 days to redeem a travel event from the day it posts.
Other cards, such as the Chase Sapphire Preferred, offer a portal that you redeem through, in this case, the Chase Ultimate Rewards. It's actually to your advantage, because the points you've earned get 25% more value through the portal.
You can also earn and redeem your points for hotel stays or flights with loyalty brand cards. In some cases with hotel brands, you can double up on points both as a loyalty brand member and a cardholder.
Another way to use rewards points is through a shopping portal, such as Discover Deals, which allows you to get cashback bonuses or money off your purchases. Through these portals, you can shop for clothing, gifts, health and beauty aids, travel and more.
There are actually a number of different types of rewards credit cards, including cash back, hotel and airline loyalty cards, and even retail. In fact, more than 60% of credit cards issued in the U.S. are tied to a rewards program, according to The Wall Street Journal. Here are some different types of rewards cards:
Many rewards cards offer a signup bonus in cash, miles or points, with a required spend within a certain amount of time, usually 90 days or 3 months. The required spend of a cashback card is usually below that of a travel card, typically $1,000 or less. This makes it easier to meet the requirements and earn the cash bonus. For example, the Chase Freedom Unlimited offers $150 after a $500 spend within your first 3 months of card membership.
But don’t let the higher spend of the travel cards scare you away. Although the spend can be $3,000 and even $4,000, the rewards can be for 50,000 points/miles or more, which can translate into $500 and even $625 equivalent in travel.
Make sure you have the cash to pay back the required spend, because if you carry the charge over month-to-month, you basically undo the benefit of the bonus by paying interest fees.
Using a rewards card to save money only works if you use your card for purchases you plan to make anyway and if you pay your card bill in full and on time each month. That way, you avoid late fees and interest charges.
You also want to make sure that your planned spending will put your rewards above any annual fee. So, if you have an annual fee of $95, and the redemption is at 2X points on every dollar spent, you want to make sure you plan to spend at least $4,750 in a year.
Ideally, you want to focus on your best cashback, travel or rewards card, and put as many purchases as possible on it so that you earn maximum miles.
Credit card reward points can expire, but increasingly, as long as you keep your account open and active, the points won't expire. Read the fine print, because you don't want to be in a rush to use your points because they are about to expire. Often, however, as long as you make a small charge each month, those points will be there for you when you need them. Just be sure to pay in full and on time, because carrying a balance negates those points you've collected, and by paying on time, you are building your credit.
Rewards cards have oodles of advantages – it just depends on your spending habits and priorities. Not only do you get cash, miles or points for your spending habits, you can build your credit while using it.
With a cashback rewards card, you can earn cash back almost instantly, and even double your cash back the end of your first year of card membership. You can get a signup bonus of cash back after an initial required spend; up to 5% for quarterly categories; and up to 2% back for all expenditures.
Another option, the travel card, allows you to earn miles or points, as well as a signup bonus of miles or points. Also, you can be rewarded for using a favorite hotel or airline brand.
Finally, as with any credit card, rewards cards help you build your credit, provided you pay in full and on time each month. FICO, the scoring model most used by lenders, loves it when you don’t have a balance on your credit card, and FICO really loves it when you pay on time.
From incurring additional debt to impacted credit, there can be disadvantages to rewards credit cards, but nothing insurmountable. On the plus side, you can earn cash back and other rewards for using your rewards card. On the downside, you can end up owing more than you can pay off or even harming your credit. Here are possible drawbacks to rewards cards and what you can do about them:
Debit cards can have rewards programs of up to $0.10 back, but fees vary widely. For example, Discover offers $0.10 cash back on debit purchases, up to 100 transactions per month, but no monthly fee, allowing you to earn up to $120 a year. However, Green Dot gives out 5% back on all purchases, up to $100 annually, but there is a $9.95 monthly fee and there are other charges.
A debit card is really more for convenience, and it won't improve your credit. You might want to opt instead for a secured credit card, in which you pay a deposit in exchange for a few hundred dollars in available credit. Just make sure that the card issuer reports your good payment habits to the credit bureaus so that you are building your credit. And pay in full and on time each month. Also, research the fees. Once you've built up your credit with your secured card, you can apply for rewards credit cards and really enjoy the rewards benefits of a financial product.
When you compare rewards credit cards, look at annual fees, bonus signups and other factors.
Once you've check out the different aspects of several rewards cards, figure out which one you are most likely to use most often. You want a product that will be your go–to card. If you travel a lot, you might want to choose a rewards card that doubles as a travel card. If you have the potential to spend a lot on your card, but in a variety of ways, a cashback card that offers a flat rate may be the best choice.
7 strategies to maximize your rewards card:
Here are 4 things to look for in a rewards credit card:
On the surface, it doesn't make sense why card networks and credit card issuers offer rewards credit cards. Used correctly, you can get hundreds of dollars back each year. But it makes sense, once you understand the issuer business model. Here's how it works:
With all these fees floating around, what do you do? First off, pay in full and on time each month. That will keep you from paying late fees and interest charges. Also, keep an emergency fund so you won't be tempted to take out a cash advance. Finally, ask the merchant if you are being charged a checkout fee for using your Visa or MasterCard. If so and it's a big purchase, you may want to think about shopping elsewhere.
There is no typical rewards card rate. Cashback cards can pay out a flat 1.5% or 2% or they can give a higher rate for specific types of purchases, while travel cards can range in valuation from under 1% to over 2%.
For example, the Blue Cash Everyday offers 3% back on purchases made at U.S. supermarkets for up to $6,000 a year. (It's 1% after that.) That comes to $180 back. Terms apply.
Some cards, such as the Chase Freedom, pay out for categories that you sign up for each quarter. The Freedom, for example, offers 5% back on quarterly categories for up to $1,500 spend, or $75 back each quarter.
Rewards cards that are travel cards can reward you at a higher rate for going to restaurants, a generous number of points for loyalty shopping, or a flat 2X points for every $1 spent.
When choosing your rewards card, look at your spending habits. Do you love one particular travel brand? Are you not a big traveler, but you love The Home Depot, Amazon.com and Sam’s Club? A branded travel card may be a good choice. A cashback card with quarterly categories may be right for you.
Rewards on your rewards credit card are not taxable, although signup bonuses to bank accounts can be.
"Rewards and airline miles that are provided in connection with a purchase on a credit card are routinely not subject to individual income tax reporting," a Citi spokeswoman told CreditCards.com
On the other hand, "When a customer receives a gift for opening a bank account –– whether cash, a toaster or airline miles –– the value of that gift is generally treated as income and subject to tax reporting. This is separate and distinct from miles or points earned by our credit card customers for their purchases," the Citi spokeswoman said.
If you’re wondering whether a rewards card is right for you, ask yourself these 5 questions:
|Card||Welcome Bonus||Bonus Requirement||Rewards Rate|
|Capital One® VentureOne® Rewards Credit Card||20,000 Miles||Spend $1,000 on purchases within 3 months from account opening||Unlimited 1.25 miles per dollar on every purchase, every day|
|Capital One® Venture® Rewards Credit Card||50,000 Miles||Spend $3,000 on purchases within 3 months from account opening||Unlimited 2X miles per dollar on every purchase, every day|
|Discover it® Cashback Match™||Discover will match all the cash back earned at the end of your first year, automatically||Automatic||Earn 5% cash back at Amazon.com and Target now through December 2017, on up to $1,500 in purchases when you activate. Plus, 1% cash back on all other purchases.|
|Chase Sapphire Preferred® Card||50,000 Bonus Points||Spend $4,000 on purchases in the first 3 months from account opening||2X points on travel and dining at restaurants worldwide & 1 point per dollar spent on all other purchases|
|Bank of America® Cash Rewards Credit Card||$150 Online Cash Rewards Bonus||Spend at least $500 on purchases in the first 90 days of account opening||Earn 1% cash back on every purchase, 2% at grocery stores and wholesale clubs, and 3% on gas for the first $2,500 in combined grocery/wholesale club/gas purchases each quarter|
|Bank of America® Travel Rewards Credit Card||20,000 Online Bonus Points||Make at least $1,000 in purchases in the first 90 days||Unlimited 1.5 points per $1 spent on all purchases|
|Chase Freedom Unlimited®||$150 Bonus||Spend $500 on purchases in your first 3 months from account opening||Unlimited 1.5% cash back on every purchase|
|Wells Fargo Cash Wise Visa® Card||$200 Cash Reward Bonus||Spend $1,000 in the first 3 months||Earn unlimited 1.5% cash rewards on purchases|
|Citi® / AAdvantage® Platinum Select® World Elite™ Mastercard®||60,000 American Airlines AAdvantage® Bonus Miles||Make $3,000 in purchases within the first 3 months of account opening||Double AAdvantage® miles on eligible American Airlines purchases|
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