What Is a Rewards Credit Card?
Rewards credit cards provide some form of “reward”—typically cash back, points, or travel miles—for every dollar spent, up to specific restrictions. You may then spend your points in a number of ways depending on the card.
- For every dollar spent, rewards credit cards often provide cash back, points, or travel miles.
- Customers that pay their debt in full each month benefit the most from rewards cards. Otherwise, the interest rates might soon outweigh the benefits.
- The ideal rewards card for you will be determined by your spending patterns and how you want to redeem your benefits.
How Rewards Credit Cards Work
Today, rewards cards account for a sizable share of the credit card industry, and they seem to have something for everyone. Aside from differing reward systems, the cards differ in terms of how your awards may be redeemed and what they can be redeemed for.
Typically, you may redeem your points for checks, bill credit, card company items, gift cards, and/or travel advantages. Your current rewards balance may be seen on your credit card statement at the conclusion of each payment cycle.
Many credit card providers also offer sign-up bonuses to attract you to join up. Those deals may include hundreds of dollars in bonuses if you meet a specified spending criteria, as well as an initial 0% APR for the first six months and no fees for the first year.
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How to Compare Rewards Credit Cards
Here are some crucial qualities to look for while looking for a rewards credit card.
- Annual charges. Although not all rewards credit cards have annual fees, many of the most attractive ones do. So, when you join up, consider the expense of any yearly fee in relation to the value of the benefits you anticipate to get over the course of the year. Unless you’re a major spender, paying an annual fee of several hundred dollars, as some high-end cards do, might quickly erase your benefits.
- Rates of interest Many reward cards have a 0% APR for the first year. However, unless you pay your debt in full each month after that, you will be liable to interest charges. Interest rates on rewards cards may be high—often 15% to 20% or higher—and they can rapidly mount up if you hold a balance. As a result, interest costs, such a high annual fee, might overshadow any incentives you get from your card.
- Fixed vs. tiered rewards Some cards include tiers of prizes, while others do not. Tiered cards provide varying degrees of rewards for various types of purchases. A tiered card, for example, may provide 3 points for every dollar spent on fuel but only 1 point for every dollar spent on groceries. Fixed cards, on the other hand, pay the same level of rewards no matter where they are used. A set rewards card, for example, may provide 1% or 1.5% payback on all transactions.
- Cashback spending limits Many cashback credit cards have limits on how much you may earn in their most attractive shopping categories. For example, a card may provide 3% cashback on the first $1,500 spent on groceries each quarter, but just 1% on any extra purchases until the following quarter starts.
A decent rewards credit card will work with your existing spending patterns rather than forcing you to alter them or overspend for the sake of rewards.
No rewards card, no matter how good it seems to be, is suitable for everyone. A lot depends on your specific scenario. So, before you begin applying, you need take a few more measures.
1. Analyze your spending habits
The greatest rewards card for you will be one that takes advantage of your regular purchasing patterns while not driving you to alter your behaviors just for the sake of earning rewards. Do you, for example, spend a lot of money each month on fuel, groceries, or restaurant dining? If so, a card that offers additional benefits in those areas may be the ideal fit for you.
Are you a frequent traveler? In that situation, a card that rewards travel purchases and enables you to redeem your points for more travel may be the ideal option. Similarly, if you purchase the majority of your apparel or home products from a certain shop or stay at a specific hotel chain, a co-branded rewards card issued in collaboration with that firm may make sense.
Consider how much money you spend overall. If you only spend $1,000 or $2,000 per month on credit cards, a card that needs you to spend $15,000 in the first three months to obtain a large initial bonus will be of little benefit to you. (Worse, it may incite you to splurge!) Look for a card with a lower spending requirement and, most likely, a lesser initial bonus in that scenario.
2. Check your credit score
A decent credit score is required to qualify for a good rewards card. According to Experian, one of the three main national credit reporting agencies, a credit score of at least 670 is normally required to qualify for a rewards card. (A secured credit card may be an alternative for persons with weaker credit ratings. Some of them also offer reward systems.)
So, before applying for a rewards card, check your credit score and keep in mind that cards with greater perks and larger spending limits may be out of reach if you have a limited or less-than-perfect credit history. Furthermore, applying for too many credit cards will lower your credit score.
The Bottom Line
There are several reward cards available, but getting the appropriate one for you may need some investigation. If you need some assistance, Investopedia maintains often updated rankings of the best rewards credit cards for certain user categories. Keep in mind that you may need more than one rewards card. By combining travel, points, and cashback cards, you may create a combination that maximizes the value of all of your spending.
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