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A rewards credit card offers one or more incentives for frequent use: When you use a rewards card to make purchases, you accumulate credits in proportion to the amount you spend.
Rewards cards are hot right now: a recent Experian survey found that 45% of Americans who plan to apply for a new credit card want a rewards card. But with hundreds of options available, which card makes the most sense for you? And how can you avoid the risks that inevitably come with the rewards?
45% of Americans who plan to apply for a new credit card want a rewards card.
If you choose carefully and take care to avoid potential pitfalls, you can benefit greatly from rewards credit cards, and even use them to help improve your credit scores.
|Rewards credit cards might be right for you if:||Rewards credit cards might NOT be for you if:|
|You have good or excellent credit scores||You have lower credit scores (you may not get approved)|
|You travel frequently||You carry a balance regularly on your credit cards|
|You don't carry a balance or carry a low balance||You don't travel much and/or you fly different airlines and stay at different hotel chains when you do travel|
|You spend in categories such as restaurants, gas and groceries|
How Rewards Credit Cards Work
Ideally, rewards are a win-win for you and the credit card issuer. The issuer wants you to get in the habit of pulling its card from your wallet before any other card (and maybe start using it for transactions where you might normally use a debit card). To encourage you to do so, the issuer provides you with incentive credits, which take a variety of forms:
Cash Back Credit Cards
The most popular rewards cards offer a rebate—typically a credit to your account at the end of the year—proportional to the number of purchases made with the card. The most common cash back amount is 1%—a penny back for every dollar you spend—but 1.5% cards are gaining popularity.
In addition, "luxury rewards" cards with high borrowing limits and offered to individuals with excellent credit scores, offer rebates as high as 2%. Some rewards cards offer rotating categories so you can earn more cash back on different things each quarter—such as groceries or gas.
For example, the Citi® Double Cash Card lets you earn cash back twice on every purchase with unlimited 1% cash back when you buy, plus an additional 1% as you pay for those purchases.
Travel Credit Cards
Cards affiliated with airlines or hotels can award anywhere from one to two flight miles for every dollar spent (1.25 miles-per-dollar and 1.5 miles per dollar are increasingly common). Awards may be higher when the card is used to purchase airline tickets—with the card's affiliated airline and, sometimes, even with other carriers. Mileage cards are very popular with business travelers, who use their cards to book reimbursable work trips, and then keep bonus miles for personal use.
Some cards require bonus miles to be redeemed only with the affiliated airline; others let you fly with any carrier. Redemption of bonus miles may be subject to blackout dates or other exceptions, as detailed in the cardholder agreement. One example of a travel card is the Gold Delta SkyMiles® Credit Card from American Express.
Credit Cards With Points
Sometimes referred to as using terms such as "bonus dollars," these are calculated the same way as cash-back rewards and bonus miles—typically a point for each dollar spent on the card—but they must be redeemed for items or services from a catalog specific to that card. Points customarily accumulate in real time—you don't have to wait until the end of the year to collect or use them—but they also may have expiration dates before which you must use them or lose them.
Depending on the card, points may be redeemed for gift items, merchandise at affiliated retailer(s), stays at hotels, theme parks, or resort properties, or magazine subscriptions (a classic way to "burn off" leftover points before they expire).
Many cards offer special rewards bonuses on specific types of purchases. For example, some cards double or triple the number of credits you receive for booking flights directly through the airline, buying gasoline, or shopping at specific retailers.
Other cards may increase the bonus percentage on specific purchases, such as a card with a standard 1% rewards rate offering a 5% reward on flight purchases.
An increasingly popular approach is "rotating rewards," which provides deals on certain purchases every 90 days or so. You might get double rewards for instance, on gas purchases made during the summer, and on movie tickets purchased in the winter.
Sometimes these rewards are limited to specific retailers or vendors, other times they're more open-ended—but they only last a limited time, after which a new set of deals is made available. Details on how these deals work, and when they begin and end, are provided with card statements and on the card's website.
Making the most of rotating rewards takes some focus and discipline. Savvy users have developed techniques from web-calendar notifications to cell phone alarms to sticky notes as reminders of the special deals available. Smartphone apps provided by many card issuers can also help you take full advantage of these deals.
Card issuers may also offer sign up or introductory bonuses with additional points for getting a new card and spending a certain amount in the first few months. For instance, the Chase Sapphire ReserveSM Card offers 50,000 points after purchases of $4,000 within first three months from account opening.
Find the Card That's Right for You
The best approach to choosing a rewards card is to try to find one that gives the best value based on your normal spending habits. Look for a card that rewards what you already do, as opposed to one that'll make you increase your spending amounts or frequency in pursuit of points.
Chances are good some of the rewards offers you're receiving already align with this approach: retailers where you shop often, hotels you frequent, and travel services you use regularly are likely already sending offers your way. You can look for additional offerings in the Experian CreditMatch where you can be matched for free with cards based on your credit profile and spending habits.
Once you've narrowed the field to a short list, read the cardholder agreements that come with the cards. Use them to familiarize yourself with the specifics of its rewards program. Don't forget to compare credit card fees and annual percentage rates (APRs) as well. Rewards are great, but a lower interest rate can mean big savings as well over the life of a card.
Questions To Ask Before Getting a Rewards Credit Card
Here are the questions you should ask yourself to pick the right rewards card for you:
1. What Types of Rewards Are Offered?
The most important question you'll want to ask when it comes to rewards cards is whether you want to get cash back in the form of statement credits or money deposited back into your bank account—or whether you want to earn rewards in the form of travel credits that will help you qualify for free or discounted flights or hotels.
2. How Can You Maximize Your Rewards?
Next, you'll want to consider how you spend your money so that you can maximize your rewards earning. Do most of your credit card spendings come from groceries and gas? If so, you'll want to look for a card that offers a higher percentage back on those purchases. Or, if you are a jet-setter, there are some cards that offer three times as many points on travel and dining purchases. If you don't want to think about how you spend your money, you might be better off with a card that offers a flat cash back rate.
3. What Sign up Bonuses Can You Take Advantage Of?
Many rewards cards offer sign-up bonuses. Find out what the bonus is, and how much you need to spend to qualify for it. Many cards will fulfill your bonus once you've spent a certain amount of money during the first few months of owning the card—the lower the minimum spend, the better.
4. If and When Do Rewards Expire?
Ask whether your rewards will expire or if they are usable as long as the account is open. You'll also want to check out if any blackout dates exist for any travel rewards.
5. Is There an Annual Fee? If so, What Is It?
You'll want to consider how much you need to spend each year in order to make that fee back with rewards you will earn.
Get the Most from Your Card
The popularity of rewards cards has spawned a cottage industry in blogs and other websites dedicated to maximizing the accumulation of miles and points. For those with less time or dedication, the key to a good rewards-card experience lies in taking advantage of the bonuses while avoiding potential problems. Here are some guidelines that apply to any rewards card:
Don't Get in Over Your Head
The biggest potential risk connected with rewards cards may be the tendency to make extra purchases in order to gain extra points. Take care not to get spread too thin in your zeal for rewards.
Switching to a rewards card for purchases you'd normally make with a debit card, such as groceries or fuel, is fine as long as you plan to pay off those purchases in full each month. But "big-ticket" buys that push your rewards level to new heights could end up costing you in the long run if they lead to outstanding balances and interest charges on the purchases.
Coordinate an Intro Bonus with Major Purchases
Many rewards cards offer a substantial number of points or miles (10,000, 20,000 or even 50,000) as an introductory bonus when you open your account, but only if you charge a minimum amount (such as $3,000, $5,000 or $9,000) within the first three months of signing up.
A little planning ahead can help you make good use of these deals, without getting overextended: Apply for your rewards credit card three or four months before you plan to make a major purchase you've already saved for (booking a vacation, say, or buying furniture or appliances). Put the purchase on your new credit card, and then pay it off with your savings to help earn the intro bonus without incurring any finance charges.
Look for No-Fee Cards
Many rewards cards come with annual fees. A typical sum is $95, though some are less, and others several times more. Credit card issuers often waive the fee for the first year, which makes it easy to overlook, but don't ignore it.
At a cash-back rate of 1%, it'll take $9,500 in purchases just to cover a $95 annual fee, so make sure you don't end up having to spend more cash than you get back. (Calculating the breakeven-point on mileage and points cards is trickier, but the same logic applies).
If your strategy is to pay the card off in full then cancel it before the annual fee kicks in, think again: Closing card accounts reduces your total available credit—a factor that can lower your credit scores. That doesn't mean you should never close an account, but your best bet, if possible, is to stick to no-fee cards.
Applying For a Rewards Credit Card
Be careful applying for cards in succession. When you apply for a new credit card, the card issuer typically requests your credit report—a process known as making a hard inquiry. A hard inquiry usually causes your credit scores to drop slightly. When a lender accepts your application and you open a new credit account, your scores typically dip a bit more.
As you long as you keep up with your payments, the scores typically rebound within a few months, and they may even increase somewhat, in recognition that you're successfully managing additional credit.
Make sure you give your credit scores time to bounce back between card applications because if you apply during one of those temporary score-reduction periods, you'll be offered less attractive borrowing terms than you'll get when your scores are at their maximum.
If you invest a little time and research before you sign on, and choose a rewards card that suits your budget and spending habits, you can find a rewards credit card that helps you do more of what you like to do for less money. That's a real bonus.
The information related to the Chase Sapphire Reserve® credit card has been collected by Experian and has not been reviewed or provided by the issuer of the card.
Editorial Disclaimer: Opinions expressed here are author's alone, not those of any bank, credit card issuer or other company, and have not been reviewed, approved or otherwise endorsed by any of these entities. All information, including rates and fees, are accurate as of the date of publication.
This article was originally published on March 8, 2018, and has been updated.