Wouldn't it be nice to pay for dinner and get cash back to help offset your next night out? Or score a "free" vacation using points and miles earned from just paying for your everyday expenses? With a rewards credit card, you can.
Whatever your preferred style of earning and redeeming rewards, there's a card out there that fits your needs. The sheer number of options available creates a paradox of choice and the "right" card for one person may not be right for another.
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I currently mix and match about half a dozen rewards cards for my everyday spending, but it took a lot of research and analysis to choose the ones that were most worthwhile to me. Although there's no such thing as a perfect card, CNET Money has done the legwork to help you pick one and start earning.
What is a rewards credit card?
A rewards credit card offers a return on the purchases you make in points, cash back or miles. You can then turn those rewards into statement credits, which will lower the overall balance of your credit account, or as direct deposits, which will increase your bank account balance.
There are other ways to redeem rewards, such as for travel or toward future purchases, depending on the card. Points generally have more valuable redemption options than cash but not ack, and how you redeem them could affect how much they're worth.
The primary use for a rewards card is to provide a return for purchases you make regularly. There are rewards cards with and without annual fees, so you're able to choose whichever one fits best into your budget.
How to choose the best rewards credit card
You'll first want to look at your spending habits to determine which type of card will offer the best rewards. If you dine out often, for instance, a restaurant card that earns higher rewards for dining purchases might suit you best.
If your spending is less predictable, or if you don't want to strategize to maximize your rewards, a flat-rate rewards card might work better for your lifestyle.
Next, compare a card's rewards rate and perks to its annual fee. You'll want to make sure the benefits you use each year outweigh the card's annual fee. A card's welcome bonus, introductory APR and other features may factor into its total value as well.
If there's a welcome bonus, make sure you can qualify for it through your regular spending and that you won't need to stretch your budget to meet the minimum spending requirement.
Also, consider how you can redeem your rewards. Most rewards cards offer statement credits, but there could be other ways to redeem your rewards that will be more lucrative. For example, you can often get more value from each credit card point by transferring the points to an issuer's travel partners.
Types of rewards credit cards
Here's a breakdown of some of the most common types of reward cards:
Travel
Travel rewards credit cards provide a way to turn your rewards -- usually earned as points or miles -- into trips. They also tend to offer a number of travel-centric perks ranging from expedited airport security, airport lounge access or waiving checked bag fees.
Cash back
Cash-back credit cards offer a straightforward return on your spending. They usually have fewer redemption options and lower welcome bonuses but offer a simple approach to credit card rewards. The cash back can be transferred to your bank account or applied to your credit card balance.
What experts are saying about rewards credit cards
With the sheer number of credit cards available, it may be intimidating for people to get into. According to credit expert Julia Menez, it doesn't need to be.
"A lot of people look at the internet and think, they have to dive super deep, super fast and get 20 cards in order to get any type of meaningful rewards, which isn't true," she said. "You just need to know how to strategically time everything."
If you can reach a card's welcome bonus via a large, planned purchase, you can get a good value right away from a single card, Menez said.
It's also wise to pick a card that matches how you spend, according to credit expert Shonda Martin. "If you're constantly DoorDashing and/or ordering groceries online and things of that nature, then you should look for a card [that matches that]," she said.
It's important to make the card work for you, rather than trying to mold your spending habits to the card, said credit card expert Gerri Detweiler.
"If, for example, you travel a lot then you may want a travel rewards card," she said. "If you're loyal to a particular brand, whether it's an airline or a hotel chain, consider a card with rewards specific to that particular brand."
While getting the highest value from rewards may take a little bit of work and time, you can also keep it simple. "A card with a good flat reward way rate might be a better bet," Detweiler said. Flat-rate rewards cards offer a set amount back on every purchase, so you don't have to strategize your spending in different categories with different cards.
Just be wary of the annual percentage rate on your rewards credit card, said credit expert Beverly Harzog. "Because your credit card issuer is giving you rewards, you're going to have a higher APR," she said. That means it's imperative that you don't carry a balance on your rewards credit card.
"If you use cards strategically, you can save a lot of money. But you have to be organized. And you have to pay that bill every month when it comes," Harzog added.
How to get the most out of your credit card rewards
The best way to maximize your rewards is to use your card to earn points on everyday expenses and then redeem your rewards in the way that provides the greatest per-point value.
In the case of travel credit cards, you could find the highest redemption value for past travel expenses or by transferring credit card rewards to airline or hotel loyalty programs.
Ultimately, you'll need to pay attention to your card terms to figure out the best way to redeem your rewards and pay your credit card bill on time and in full so that interest charges don't eat away at your profit. Some cash-back rewards cards have rotating spending categories where you can earn a higher rewards rate -- as high as 5% -- but they often have spending limits before rewards fall to 1%. For example, one quarter may include gas stations in the higher reward category and another quarter might include grocery stores.
Is a rewards credit card right for you?
Rewards credit cards can be great for earning a return on your spending. If you don't have a credit card that offers rewards, you could be losing out on cash back or travel points every time you swipe. Similarly, a travel rewards credit card can be a great way to save time and money if you travel frequently. Decide what it is you're trying to do with reward points, such as using them for a particular trip. From there, you can determine what type of points you'll need.
The important thing when it comes to rewards cards is finding the right card to maximize rewards on your everyday essential purchases, not changing your spending habits or buying things you don't need or can't afford just for the sake of earning rewards. Remember, if you carry a balance from month to month or miss payments, fees and interest charges could quickly wipe out any rewards you may earn.
Alternatives to rewards credit cards
If you're wary of spending on a credit card, whether you're afraid of getting enticed into overspending or you'd rather avoid credit card debt altogether, you could look into a debit card that earns rewards. You aren't able to spend more than what's in your account so you won't have to worry about interest charges. Debit cards won't charge you an annual fee, either.
They also won't offer as high a reward rate as credit cards. You can expect to earn only about 1% cash back on your purchases in most cases. Debit cards also won't feature things like travel accident insurance or other protections.
The best strategy is to treat your credit card as a debit card. That means not spending money you don't have and paying off the purchases you make right away. Set up autopay for the full statement balance each month to make sure you never miss a credit card payment and that you won't have to deal with interest charges eating into your rewards.
How to apply for a rewards card
Follow these steps to apply for a rewards credit card:
- Choose a card with rewards that align with your budget, travel goals and lifestyle.
- Follow the appropriate link above to be taken to the credit card issuer's secure site.
- Fill out the appropriate financial and personal information.
- Use the card responsibly and pay on time.
FAQs
Are credit card rewards taxable?
Credit card rewards earned from spending -- whether the cash back you earn from regular purchases or a sign-up bonus you receive for meeting a spending threshold -- are generally not taxable income, as the IRS considers such rewards to be a rebate of your own money.
If you receive credit card rewards without having to spend money -- such as a referral bonus for referring a friend -- those rewards may be taxable. Always check with a tax expert if you're unsure about what to report on your taxes.
Do credit card rewards expire?
Some credit card rewards do expire -- whether after a certain amount of time has elapsed since earning the points, after a period of account inactivity, or when you close your account. You can find out if yours will by reading the terms and conditions that come with your card.
Can you combine credit card points?
Some issuers let you combine points across multiple credit cards in the same family or brand of credit cards.
Not every credit card will let you combine points across cards, even if the issuer has other cards with transferable points. Be sure to check the terms and conditions of your specific card's rewards program.
How can you compare cards that earn points and miles to other rewards cards?
When redeeming points as cash back, statement credits, pay with points or other cash-like transactions directly from the issuer, it's usually simple to calculate the value. Divide the cash value of your rewards by the number of points it costs to get the cents/point value. Most issuers let you redeem cash back at 1 cent per point.
If you're redeeming your points through an issuer's own travel portal, your points will typically follow the standard redemption rate set by the issuer. These rates may vary depending on the card, so check your card's terms and conditions.
It's a bit more complicated to calculate the cash value of your points or miles when booking travel through an airline or hotel's loyalty program, whether you're transferring points from a general travel credit card or earning points directly through the hotel or airline's co-branded card. You can calculate the value of a specific redemption by dividing the point cost by the cash price you otherwise would've paid for the same booking. For example, if you spend 20,000 miles on a flight that would've otherwise cost $400, you'd be getting a value of 2 cents per point.
Is cash back better than points?
Cash back is a more accessible concept, but cash back and points both have their strengths and weaknesses. Cash back can be more universally applicable, but points are often worth more in value than their cash-back equivalents. Depending on your shopping preferences and plans, you may find points or cash back to be more valuable to you.
Related credit card articles
- How to Maximize Your Credit Card Cash Back
- I Use Travel Credit Card Rewards to Score Thousands of Dollars in 'Free' Trips. Here's How
- How do Credit Card Points Work?
- Is Your Credit Card Annual Fee Worth It?
- Inflation Could Be Reducing the Value of Your Credit Card Rewards. Here's What to Do
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