The way people spend money is moving further and further away from cash, and more into digital forms of managing and using money. In developed countries such as the US, that means making most payments with credit cards, which led to the creation of special types of credit cards that offer specific perks for using them.
Rewards credit cards, for example, were invented with a specific purpose, which is to reward spending in some way. Depending on the card, the card issuer, or the terms that they offer, those rewards can include different things, such as cashback, travel miles, points, and alike. Essentially, for each dollar that the user spends, they get some sort of a reward, often up to a certain limit.
The rewards can then be used in different ways, which also depend on the card and the deal that you have with the issuer. The concept itself is highly interesting, which is why we decided to look into rewards credit cards and see what they have to offer, and how they work exactly.
Rewards Credit Cards: How do they work?
Reward credit cards represent a rather large portion of today’s credit card market. Their diverse offering ensures that there is something for everyone, including different reward structures. Apart from that, the cards can also offer different ways to redeem the rewards, as well as different things that they can be redeemed for.
The most common way to redeem rewards is to receive a check, merchandise, or statement credit which are granted by the card issuer. Then, there are also things like gift cards, or even travel perks for those who prefer that. You can easily find your rewards balance on your credit card statement at the end of every billing cycle, so you can keep track of how much you have in terms of rewards.
Apart from the rewards that you get from using the cards, you can also receive rewards for opening it, in the first place. These rewards are often offered by card issuers as a welcome package, to attract users to their card, and incentivize them to get one, in the first place. As for what these offers may include, it can be any kind of benefit, although it is usually several hundreds of dollars in incentives after the user reaches a certain spending milestone.
It is also common to offer a 0% APR for the first several months, or a zero-fee offer during the first year of usage.
As you can see, there is a lot to consider, and it is not surprising for new would-be credit card users to find it all a bit overwhelming at first. Choosing the right credit card to start with is a big, important decision, which can often be rushed. This is something that you might regret later, if you happen to make the wrong choice. Instead, we offer a different approach — collect information about each credit card that you are interested in, and compare their features.
How to compare rewards credit cards?
At the first glance, all rewards credit cards might look the same to you, but if you take a deeper look, you will quickly find that this is not the case. In fact, they can be quite different, which is why it is very important to carefully compare them before you make a choice. We recommend focusing on the following list of features before you make your ultimate choice.
1) Annual fees
The first thing to look into is how much is it going to cost you to own a rewards credit card in the long term, or, in other words, whether there are annual fees and how high are they, Not all cards come with annual fees, but many of the more lucrative ones do. This is a fairly simple equation, and all you need to do is look at what rewards are offered, and then compare that to the cost of maintaining the card. If you feel that the cost is worth the benefits, then by all means, proceed with the comparison. However, do keep in mind that some high-end cards can charge you as much as several hundreds of dollars, which can be a deal-breaker for users who are not major spenders.
2) Interest rates
A lot of rewards credit card issuers will try to make their card seem more inviting and beneficial by offering 0% APR for the first year of usage. However, this is only a part of their promotional package, and after that, you could be facing some rather hefty fees if you happen to miss a payment of your balance. These interest rates can go up to 20%, which will more than make up for the first year of no fees, if you are not punctual. Keep that in mind, and regardless of which card you choose to go with — remember that paying your balance on time will be good for your overall credit score, while missing them will knock it down, leading to a whole new world of troubles.
3) Rewards: Fixed vs tiered
Next, you will want to check out the rewards structure, and determine whether they are tiered or fixed. Different cards can have different rewards structure, with tiered rewards offering different levels of rewards for different kinds of purchases. For example, fixed cards can offer the same level of rewards regardless of where you use them, while tiered cards might offer a specific number of points per dollar spent in a specific place. In other words, you might get 3 points per dollar if you buy gas, but only 1 point per dollar if you buy groceries. Fixed reward cards, on the other hand, could offer cashback, granting you 1% to 1.5% to all purchases, no matter where you use it.
4) Cashback caps
Speaking of cashback, it is worth noting that rewards cards that offer it might have a cap on how much you can earn from cashback. For example, you could be eligible to receive 3% cashback for the first $1,500 you spend per quarter, and then it drops to 1% for all purchases beyond that. This is an important detail that will strongly influence your rewards, so remember to check that out before opening a card.
Finding the best rewards credit card for you
So far, we have talked about how to identify which card offers what, but now, the final thing to deduce is which card is the right one for you, and how you can identify it after you have done your comparisons. There are two things that you need to do here:
1. Check your credit score
Start by getting your credit score and credit report from your card issuer or one of the major credit bureaus. You should know that no anyone can get a credit card, and that you need a good credit score in order to be eligible, otherwise the credit card issuers will consider you a risk. If your credit score is strong, then you likely won’t have any problems getting any card you may want. However, if your credit score is bad, you will have to turn to one of the secured credit cards, or one of the credit cards designed for people with a bad credit score.
In both cases, your available rewards will be limited, but the benefit is that you can use either of these two types of credit cards to improve your credit score, and eventually get the ability to upgrade to better cards.
2. Analyze your spending habits
The second thing to do is to analyze your spending habits, and take advantage of them. You should get a card that will allow you to make your regular spending easier, but not one that will force you to change your habits. Assuming that your credit score is good, and that you have all options available, you should check where do you spend the most – is it on gasoline, groceries, restaurants, traveling, or something else?
With that knowledge, you can turn to the credit card that is specifically made for those kinds of expenses, whether that means offering the most points in return for spending the money in a specific type of service, or getting cashback for doing the same. You can find a card that has rewards that will complement your lifestyle, but do not try to get one that will have to force you to change it, as this is very difficult to do, and you are more likely to start using the card in a bad way, which could damage your credit score moving forward.
Rewards credit cards are a great way to receive extra benefits from your regular spending, which is ultimately beneficial for your way of life. However, you will first have to decide which cards fit your way of life, and then select the best one from that specific group of cards. With a bit of research and comparison, you can get a card that will let you live your life as usual, spend the same amount of money upfront, and even get rewards for doing so.
If you would like to sign-up for one of these cards, view our list of the Best Rewards Credit Cards.