What is a rewards card?

A rewards card is a credit card that offers extra benefits based on your spending. Those benefits could be cash back, air miles, or points toward a purchase—even of a new car. The more you spend, the more rewards you earn. There are many different types of rewards cards, and companies change their benefits frequently.

Rewards card benefits:

Lots of options. If there is a store, a charity, or a brand you love, there is probably a rewards card affiliated with it. If you don’t want to tie your rewards to one company, many cards offer cash back or points you can redeem to buy what you want

Generous benefits. If you stick with a specific store, getting back 3 percent of your spending is not uncommon. If you are rewarded for all spending on the card, 1 percent is the norm, but you may get 1.5 percent.

Up-front bonuses. It’s more common now for credit cards to give a bonus for signing up. That can be extra air miles, a store discount, or even credit on your statement (let’s say, $100). The reward might be contingent on your spending a certain amount in the first few months.

Rewards card drawbacks:

High interest rates. Rewards cards make sense only for people who pay their bill in full every month. If you carry a balance, the high interest rates (often around 25 percent) will cost you more than the value of the rewards you receive.

Loyalty required. You need to stay loyal to to a store or brand to maximize rewards. If you don’t want to do that, get a card that rewards all your spending and gives you flexibility as to how to claim the reward.

Rewards can be hard to redeem. Frequent flier points are notorious for being difficult to redeem. If you don’t travel frequently, you may be better off with a card that rewards everyday purchases.

You need excellent credit for the best deals. But you can still qualify for rewards if you have good credit.

Annual fees. Cards with the most generous benefits have annual fees ranging from $30 to several hundred dollars. You may have to spend a lot to justify the fee.

Which type of rewards should I choose?

The best rewards are the ones you are most likely to redeem, so think about how you spend money. If you travel frequently, you may want to apply for a card that offers miles that can be redeemed on airlines. If you spend a lot of time in your car, a card that gives you cash back on gas purchases might be better. If you can’t narrow down the perfect reward, consider a general cash-back card that gives you money back on every purchase you make. Be sure to consider the fees the card charges (rewards cards often charge an annual fee), as well as interest rates and other terms and conditions. Also, if you tend to carry a balance, consider whether the interest rate charged is too high for the reward to be worthwhile. Here are some steps to take when choosing a rewards card:

Compare rewards formulas. Card companies have different ways of calculating rewards. With airline frequent-flier programs, for instance, the number of miles needed to qualify for a round-trip flight varies. With a cashback card, some cards offer 1 or 2 percent cash back on all expenses, but other cards offer up to 6 percent, but only on certain expenses, such as gas or groceries. They may also rotate their cash-back deals every quarter.

Check redemption policies. Some rewards are easier to get than others. Frequent-flier miles are notoriously hard to redeem, for example. Cash-back cards are often the easiest, but some require you to call the credit card company to get the cash back—an extra step.

Check whether points expire. With airline cards, it can take a long time to accumulate enough points for a ticket, so find out if your points will expire before that happens.

Watch out for spending limits. Some cards may offer only cash back or points up to a certain spending limit. For example, at least one rewards card gives you 5 percent back up to $5,000 in spending per year. After that, the cash back drops to 2 percent.

Understand the penalties. Some cards will forfeit the points earned on purchases if you make a late payment.

How should I pick a cash back card?

There are two main considerations to keep in mind when shopping for a cash back card. The first is its costs, in terms of the interest rates and fees you’ll be charged. But because these cards reward you by reimbursing a percentage of what you spend on some or all purchases, you also need to decide whether a card’s particular cashback formula is a good fit with your actual spending patterns. For example, there’s no point in choosing a card that generously rewards you for gasoline purchases if you don’t own a car. Many of the terms are spelled out in the fine print, but review each card for the following:

Rewards formula. One card might give you 1.5 percent in cash for all spending. Another could give you 5 percent cash back for spending on certain things, such as groceries, up to a certain limit, but 1 percent for everything else. Others rotate categories of purchases they reward each quarter. One new innovation is “double cash” cards, which pay 1 percent when you buy something with the card and 1 percent when you actually pay your monthly bill.

Redemption policy. Getting your cash back with these cards is generally easy, but some require you to call the credit card company or log on to the website—an extra step. Transferring the cash rewards to your bank account or adding it as a credit on your statement may be an option.

Other benefits. Cash back rewards may be combined with other card benefits, such as no interest on purchases and balance transfers for an introductory period.

Minimum rewards. You may need to accrue a certain amount of cash back ($25, for example) to claim a reward.

Annual fees. The more generous cash back cards may have an annual fee, which could be well worth the cost if you spend enough. Also, if you have average credit, paying a small annual fee might be the only way to qualify for a cashback card. Most rewards cards are for people with excellent credit.

How should I choose an airmiles card?

The most important factors in deciding which airmiles card to apply for is where you travel and which airline you are most likely to use. If you tend to travel on one airline consistently, an airmiles card sponsored by that airline could help you earn free flights. If you aren’t loyal to a particular airline, a card that allows you to redeem miles across a variety of airlines may make more sense. When looking for an airline card, also consider what kinds of additional benefits it offers, such as whether you can redeem miles for hotel stays and car rentals and whether the card provides other benefits such as priority boarding and free baggage check.

Here are some other factors that can help you decide:

Consider the annual fees. Travel cards often have two tiers—one with no annual fee that offers only basic benefits and another with a fee of about $95 that offers valuable benefits, such as a free checked bag, priority boarding, and possibly travel insurance. The annual fee is quickly recouped if you travel frequently.

Check to see whether the airline is part of an alliance. If you have a card sponsored by a particular airline, you may still be able to redeem miles on other carriers if they are part of the same alliance.

Compare mileage plans. With most cards, 1 mile equals 1 percent of every dollar spent, or 1 cent. Some cards, though, will offer double miles for every dollar spent.

Look for up-front bonuses. There are cards that will credit you with tens of thousands of miles or give you an up-front bonus for signing up, as long as you charge a certain amount to the card in the first few months.

Watch for expiration dates. Check to see whether miles expire over time. It may take years to accumulate enough miles to earn a free ticket and even more time before you have the opportunity to use them.

How should I choose a rewards points card?

Rewards points credit cards use a point system to reward users for spending money on the card. In general, each dollar you spend earns you 1 point, which can be redeemed for travel, purchases, or gift cards. Choosing one is not unlike choosing any credit card—you need to compare interest rates, fees, and other terms.

Often issued by banks, such cards are very flexible. But you’ll need to do some research to make sure you can redeem the points for things you want. If not, you may prefer a card that simply gives cash back. Many of the details on how the rewards programs work is in the fine print, so be sure to read the terms carefully.

Compare rewards programs. Many banks have their own rewards programs, and there may be extra benefits for using the card affiliated with your bank. Look for a program that is versatile and easy to use. You can often redeem points for travel,restaurants, online purchases, gift cards, or cash. You may be able to transfer them to a frequent-flier or hotel reward program.

Review the point formula. You may get a point for every dollar spent, but frequently cards offer more for certain purchases. You might get 2 or 3 points for every dollar you spend on travel and restaurants, for example.

Look for up-front bonuses. Lately, card companies are trying to attract customers with one-time bonus point deals when you spend a certain amount in the first few months after signing up. You may also get bonus points for adding a second authorized user.

Review tiers. There may be two tiers of cards affiliated with the same rewards program, one with no annual fee and one with an annual fee but extra benefits.
Note expiration dates. Most cards let you accrue an unlimited number of points over a year, but if you don’t redeem them within a few years, you may have to forfeit them.

Watch for penalties. With some points cards, if you miss a payment, you may lose points or even get temporarily kicked out of the program and have to pay a reinstatement fee to get back in.