If you’re a responsible credit card user, rewards credit cards can give you value every time you swipe your card. But picking the right rewards credit card can be complicated.
Before you start searching, it’s important to understand how rewards credit cards work, what types of rewards programs are out there, and how to compare cards.
How do rewards credit cards work?
Rewards credit cards function like any other credit card. When you get approved for a card, you’ll get a revolving credit line with a credit limit. This limit is based on several factors including the card type, your credit score, your income, and your other debts.
As you use your rewards credit card on everyday purchases, you’ll receive rewards in the form of cashback, points, or miles. Depending on the card, you may get a flat rewards rate on all purchases (such as 1.5% or 2%), bonus rewards on certain purchases, or rotating bonus categories that change every few months.
Flat-rate rewards cards
As the name suggests, these credit cards offer one rewards rate on every purchase you make. The Chase Freedom Unlimited®, for instance, offers cardholders unlimited 1.5% cashback on all purchases. These cards are great for cardholders who want a straightforward rewards program or don’t spend a lot in any particular category.
Tiered rewards cards
These credit cards offer a flat rewards rate on most purchases but give cardholders bonus rewards on certain purchases. As an example, the Blue Cash Preferred® Card from American Express offers the following rewards structure:
- 6% cashback at U.S. supermarkets on up to $6,000 spent per year (you’ll get 1% back after that)
- 3% cashback at U.S. gas stations and select U.S. department stores
- 1% cashback on all other purchases
These rewards categories don’t change, making them a good option for people who spend a lot in certain areas.
This one, for example, is a solid choice for families who spend a lot on gas and groceries. Other tiered rewards cards offer bonus rewards on other everyday purchases, making it possible to find a card that best fits your spending habits.
Rotating rewards cards
There are a few rewards credit cards out there that offer bonus rewards categories that change every few months.
The Discover it Card®, for example, offers 5% cashback on up to $1,500 spent each quarter on its rotating categories. It offers 1% back on all other purchases. For 2020, those categories include:
- January 2020 – March 2020: grocery stores (excluding Target and Walmart), Walgreens and CVS
- April 2020 – June 2020: gas stations, Uber, Lyft and wholesale clubs
- July 2020 – September 2020: restaurants and PayPal
- October 2020 – December 2020:Amazon.com, Target.com and Walmart.com
These cards are a good choice for people who spend a lot in various areas and want to take advantage of the changing categories to maximize their rewards.
Types of rewards credit cards
There are three primary types of rewards credit cards: cashback, travel, and general rewards. The best option depends on your personal preferences.
Cashback credit cards
As the name suggests, these credit cards give you cashback on every purchase you make. For the most part, cashback credit cards don’t charge annual fees. Additionally, some of them offer a 0% APR promotion on purchases and balance transfers.
Cashback credit cards are great for people who want flexible redemption options and don’t want to deal with annual fees.
Travel credit cards
Travel credit cards can get a little more complicated, with three main types of cards:
- General travel credit cards: These cards offer points or miles that are tied to the card issuer’s proprietary rewards program. You can typically redeem your rewards for a wide variety of travel purchases. You can also transfer your points to one of the card issuer’s airline or hotel partners.
- Airline credit cards: These cards are co-branded with a major airline and offer miles with that particular frequent flyer program. Most of these cards also offer other airline-related perks including priority boarding, free checked bags, and discounts on in-flight purchases.
- Hotel credit cards: These cards are co-branded with a major hotel chain and offer points through the chain’s rewards program. Some also offer special perks like a free anniversary night’s stay, elite status, and room upgrades.
Travel credit cards are best for cardholders who want free travel and the other perks that make traveling more luxurious. Most of the best travel cards charge an annual fee, though, so they’re not for the fee-averse.
“Cashback cards and those that offer travel statement credits are very simple. Airline and hotel cards, on the other hand, require a more savvy approach when it comes to redeeming the points and miles,” says Jason Steele, a journalist and credit card expert. “If you enjoy figuring out these airline and hotel programs, they can provide superior value over cashback.”
These credit cards are less common than cashback and travel rewards credit cards, but they do exist. Instead of focusing on one of the two redemption options, these cards allow you to use your rewards to book travel, get cashback or gift cards, or buy merchandise.
They typically don’t offer any special travel perks or benefits associated with many cashback credit cards. These cards are best for people who don’t want maximum flexibility when redeeming rewards.
How to earn credit card rewards
There are three main ways you can earn rewards with a credit card: sign-up bonuses, other bonuses, and everyday purchases. Depending on the card you choose, you may have access to one, two, or all three ways.
Some of the best rewards credit cards offer a sign-up bonus for new cardholders. These bonuses usually require you to spend a specific amount of money in your first few months as a cardholder.
While cashback credit cards and travel credit cards with no annual fee usually offer sign-up bonuses of $200 or less, some top travel cards offer serious rewards when you first get the card.
The Capital One® Venture® Rewards Credit Card, for example, offers 50,000 miles after you spend $3,000 in the first three months. That’s worth $500 in travel statement credits.
Some credit cards offer additional ways to get bonus rewards. For example, you may get some extra points or miles when you add an authorized user to your account. Also, some travel credit cards offer annual bonuses when you spend a certain amount throughout the year.
Most rewards credit cards offer a specific amount of cashback, points, or miles for every dollar you spend. However, this typically only counts if you make a purchase with the card. Credit card issuers usually don’t offer rewards on cash advances and balance transfers.
How to redeem your credit card rewards
How you redeem your rewards depends on the type of credit card you have. Here’s a quick summary of each of the major types of rewards cards:
- Cashback: You can generally redeem your rewards as cashback in the form of a statement credit, bank deposit, or paper check. Some cashback credit cards also allow you to use your rewards to get gift cards to your favorite retailer or restaurant.
- General travel: You can use your rewards to book travel directly through the card issuer’s rewards portal. You can also use the card to book travel and use your rewards to get a statement credit against the purchase.
- Co-branded travel: If you have an airline or hotel credit card, your best bet is to use your miles or points to score free airfare or hotel stays. Depending on the loyalty program, however, you may have other options at a lower redemption value.
- General rewards: With these credit cards, you can usually opt to use your points to get cashback, book travel, or shop for merchandise. You may even have the opportunity to donate your rewards to your favorite charity.
As you compare rewards credit cards, be sure to review how you can redeem your rewards. If you want more flexibility, avoid picking a card that limits how you can use your points or miles.
The costs of rewards credit cards
Since rewards credit cards provide a lot of value to cardholders, they tend to cost more in the form of higher interest rates and annual fees.
To give you an idea of the cost, here are some average credit card interest rates compared with the national average:
“Consumers should only use reward cards when they can avoid interest charges by paying their balances in full every month,” says Steele. Otherwise, the amount you pay in interest could neutralize or even exceed the value you receive from the card’s rewards.
As for fees, it generally depends on the specific credit card. For example, most cashback credit cards don’t charge annual fees, but some do. And while many travel credit cards do charge annual fees, some don’t.
Most travel credit cards — and some cashback credit cards — don’t charge a foreign transaction fee. This is a fee that you pay on every international purchase you make. A typical foreign transaction fee is 3%, which can add up over time.
Credit score requirements
Rewards credit cards usually require good or excellent credit to get approved. This typically means having a credit score of about 700 or higher. There are, however, some credit cards for fair and even bad credit that offer rewards.
For example, the Capital One® QuicksilverOne® Cash Rewards Credit Card is designed for people with limited or fair credit and offers 1.5% cashback. The Discover it® Secured Card is meant to help people rebuild credit. It offers 2% cashback at restaurants or gas stations on up to $1,000 in combined purchases each quarter, plus 1% cashback everywhere else.
If you have your eye on a rewards credit card, check the credit score requirements to make sure you have a good chance of getting approved.
How to pick the right rewards credit card
There’s no single best credit card out there, so it’s important that you know how to find the right one for you. As such, it’s also important to consider your spending habits and personal preferences.
For example, if you spend a lot on gas and eating out, you may be better off with a credit card that offers bonus rewards on those purchases. This may require a little homework on your part to find out where you spend most of your money, but it can pay off.
Also, think about your preferences surrounding the type of rewards you want, and if an annual fee is worth it.
“You have to look at how you will use the card and place a value on the rewards offered. Then, factor in the fees,” says Steele. “If you can earn a $500 airline ticket and save $100 in fees on an airline card that has a $95 annual fee, that’s better than earning $300 in cashback. But if you are unable to redeem your airline miles for a ticket worth more than $200, then the cashback card might be the better option.”
Keep these tips in mind while you compare top rewards credit cards. Doing so will make it much easier to pick a card that will give you the most bang for your buck, both in rewards and other perks.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.