At a Glance

Rewards credit cards are a smart way to make the most out of your everyday spending. With a rewards card, you can earn points, miles, or cash back for every dollar you spend, which can be redeemed for various rewards. These cards typically offer higher reward rates for specific categories, like dining or travel, and often come with sign-up bonuses, annual perks, and exclusive access to events.

The key to getting the most out of a rewards credit card is to use it responsibly, pay your balance in full each month, and choose a card that aligns with your spending habits and lifestyle. By taking advantage of a rewards credit card, you can earn valuable benefits while doing what you already do – spending money.

In this article, you’ll learn:

 

$986 billion

Is Americans' total credit card balance at the end of 2022.

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FinFact

What are rewards credit cards?

Rewards credit cards are a type of credit card that offers incentives and benefits to cardholders based on their spending. These cards are designed to provide you with rewards for making purchases, encouraging cardholders to use the card more frequently. The rewards can come in various forms, like cashback, points, miles, or other loyalty program benefits.

How do rewards credit cards work?

Rewards credit cards are a great way to earn benefits on your everyday spending. Here’s how they work:

1. Earning Rewards: When you make purchases using a rewards credit card, you earn rewards based on the card’s rewards structure. Some cards offer a flat rate of rewards for all purchases, while others have tiered rewards or bonus categories. For instance, a card may offer 1.5% cashback on all purchases but 3% cashback on dining and 5% on groceries.

2. Accumulating Rewards: As you make purchases with your rewards credit card, the rewards accumulate in your account. The accumulation may be tracked in the form of cashback balance, points balance, or miles balance, depending on the card.

3. Redemption Options: Once you have accumulated enough rewards, you can redeem them for various options, depending on the credit card’s redemption program. Common redemption options include cashback as a statement credit, travel bookings, merchandise, gift cards, or transferring points to partner loyalty programs.

4. Redemption Value: The value of your rewards can vary depending on the redemption option you choose. Some options may offer better value than others. For example, redeeming points for travel bookings or transferring them to partner programs may provide higher value than cashback or merchandise redemption.

5. Terms and Conditions: Rewards credit cards often come with terms and conditions that specify how rewards are earned, how they can be redeemed, and any restrictions or limitations. It’s essential to familiarize yourself with these terms to maximize the benefits and avoid any potential pitfalls.

6. Fees and Interest: Rewards credit cards may have annual fees, foreign transaction fees, or other charges. Additionally, it’s important to note the interest rates associated with these cards. To fully enjoy the benefits of rewards credit cards, paying off the balance in full each month is advisable to avoid interest charges.

Pros and cons of rewards credit cards

Rewards credit cards offer several advantages and benefits but also have potential drawbacks. Here are some pros and cons of using rewards credit cards:

Pros:

  • Rewards and Incentives: The primary benefit of rewards credit cards is the opportunity to earn rewards, which can be valuable and offset some of your expenses or be used for travel, merchandise, or other desirable items.
  • Extra Perks: Many rewards credit cards provide additional perks and benefits beyond the rewards themselves. These include travel insurance, airport lounge access, purchase protection, extended warranties, and discounts on certain purchases or services.
  • Tailored to Your Preferences: Rewards credit cards often come with different categories or bonus rewards for specific types of spending, like dining, groceries, or travel. This allows you to choose a card that aligns with your spending habits and earn more rewards in areas where you frequently spend.
  • Building Credit: Responsible use of a rewards credit card can help build a positive credit history and improve your credit score. Making timely payments and low credit utilization can demonstrate financial responsibility to lenders.

Cons:

  • Higher Interest Rates and Fees: Rewards credit cards can have higher interest rates and annual fees compared to basic credit cards. If you carry a balance or fail to pay your bill in full each month, the interest charges can negate the value of the rewards earned.
  • The temptation to Overspend: If you’re not careful, the desire to earn rewards may lead to overspending. It’s crucial to stick to your budget and avoid unnecessary purchases solely to earn more rewards. Responsible spending and diligent budgeting are key to avoiding debt.
  • Complex Rewards Programs: Some reward credit cards have complex rewards programs with rotating categories, spending caps, or expiration dates on rewards. Understanding and keeping track of these intricacies can be challenging and may require ongoing monitoring and management.
  • Limited Redemption Options: While rewards credit cards offer various redemption options, some cards may limit your choices or provide lower value for specific redemption methods. Reviewing the redemption options and their associated value to ensure they align with your preferences and needs is essential.
  • Annual Fees: Many rewards credit cards come with annual fees, which can eat into the rewards’ value, mainly if you don’t utilize the card enough to offset the fee.

It’s important to consider these pros and cons carefully, review the terms and conditions of specific credit cards, and assess your spending habits before choosing a rewards credit card. Doing so lets you determine whether the benefits and rewards outweigh the potential costs and make an informed decision.

Types of credit card rewards

1. Cash rewards

Cash rewards cards offer a percentage of your purchases back as cash rewards. For example, you might earn 1% to 2% cash back on all purchases, and some cards may have higher cashback rates for specific categories like groceries or gas.

2. Points rewards

Points rewards cards earn you points for every dollar you spend, and you can redeem these points for various rewards, including merchandise, gift cards, travel expenses, or statement credits.

3. Travel rewards

Travel rewards cards are often affiliated with airlines or hotel chains, allowing you to earn miles or points for travel-related expenses. You can redeem these rewards for flights, hotel stays, rental cars, or other travel benefits.

How to compare credit cards with rewards?

When comparing credit cards with rewards, there are several factors to consider to ensure you choose the one that best suits your needs.

1. Type of rewards: Consider the kind of rewards that appeal to you the most. Do you prefer cashback, points, or miles? Determine which rewards align with your preferences and are most likely beneficial for your lifestyle and financial goals.

2. Rewards structure: Examine the rewards structure of each credit card you’re considering. Look for details on how rewards are earned and if there are any restrictions or limitations. Pay attention to whether the rewards are a flat percentage on all purchases or if they vary based on spending categories.

3. Sign-upbBonuses: Some rewards credit cards offer sign-up bonuses or welcome offers that can significantly boost your rewards earnings. Compare the sign-up bonuses offered by different cards and consider their value concerning the card’s annual fee and your spending habits.

4. Annual fees and other charges: Consider the annual fee associated with each rewards credit card. Assess whether the rewards and benefits you expect to earn will offset the fee. Review other charges like foreign transaction fees or balance transfer fees, if applicable.

5. Redemption options: Evaluate the redemption options available for each card. Determine if the rewards can be easily redeemed for items or experiences that are of value to you. Compare the redemption value across different options to make an informed decision.

6. Additional benefits: Look beyond the rewards and consider the additional benefits and perks each credit card offers. This can include travel insurance, purchase protection, extended warranties, airport lounges access, or partner service discounts.

7. Interest rates and terms: Take note of the interest rates associated with each card, especially if you anticipate carrying a balance. Compare the APRs and understand the terms and conditions regarding late payment fees, grace periods, and other important factors that may impact your overall cost.

How to find the best rewards credit card for you?

Finding the best rewards credit card for you requires careful consideration of your spending habits, preferences, and financial goals. Here’s a step-by-step guide to help you find the credit card that aligns with your needs:

1. Assess your spending habits: Analyze your typical expenses and determine where you spend the most. This includes categories like groceries, dining, gas, travel, or specific retailers. Knowing your spending patterns will help you choose a credit card that offers higher rewards in those areas.

2. Determine your reward preferences: Decide what type of rewards you value the most. Do you prefer cashback, points, or travel miles? Consider the flexibility and value of each reward type and choose the one that best matches your preferences and financial goals.

3. Research different credit cards: Conduct thorough research on various credit cards with rewards. Look for cards that align with your spending habits and reward preferences. Visit credit card comparison websites, read reviews, and explore the offerings of different credit card issuers.

4. Seek recommendations and reviews: Consider seeking recommendations from friends, family, or online communities. Read customer reviews to get insights into the experiences and satisfaction of existing cardholders. This can help you gauge the overall reputation and reliability of the credit card issuer.

5. Apply and monitor performance: Once you have identified a credit card that aligns with your needs, apply. Upon approval, track your rewards earnings and evaluate whether the card delivers the expected value based on your spending habits.

Remember that the “best” rewards credit card is subjective and varies based on individual preferences and circumstances. By considering your spending patterns, reward preferences, fees, and benefits, you can find a rewards credit card that maximizes your earning potential and aligns with your financial goals.

How to redeem credit card rewards?

Redeeming credit card rewards varies depending on the issuer and the specific rewards program. However, here are some general steps to help you redeem credit card rewards:

1. Understand your rewards program: Familiarize yourself with the rewards program associated with your credit card. Read the terms and conditions, visit the credit card issuer’s website, or contact customer service to understand the redemption options and any specific requirements or restrictions.

2. Accumulate sufficient rewards: Ensure you have accumulated enough rewards to meet the minimum redemption threshold. Some credit cards have a minimum requirement before you can redeem your rewards.

3. Choose your redemption method: Determine how you want to redeem your rewards. Common redemption options include:

  • Statement credit: You can apply your rewards as a credit towards your credit card balance. This reduces the amount you owe.
  • Cashback: Some credit cards allow you to redeem your cash rewards, either by depositing them into your bank account or sending you a check.
  • Travel bookings: If your credit card offers travel rewards, you can use your rewards to book flights, hotels, rental cars, or other travel-related expenses through the credit card issuer’s travel portal.
  • Gift cards: Many credit card rewards programs allow you to redeem your rewards for gift cards from various retailers or online platforms.
  • Merchandise: Some credit cards offer an online catalog where you can redeem your rewards for a wide range of merchandise, including electronics, home goods, or clothing.
  • Transfer to partner programs: Certain credit cards allow you to transfer your rewards to partner loyalty programs, like airline frequent flyer or hotel loyalty programs, for additional flexibility and value.

4. Access the redemption platform: Log in to your credit card account through the issuer’s website or use the designated mobile app to access the rewards redemption platform.

5. Follow the redemption process: Navigate through the rewards redemption platform and select your desired redemption option. Provide any necessary details, like the number of rewards you wish to redeem or the specific item or service you want to obtain.

6. Confirm and complete the redemption: Review your redemption details, including the number of rewards being redeemed and any associated costs or fees. Once satisfied, confirm the redemption and follow the prompts to complete the process.

7. Receive confirmation and delivery: After successfully redeeming your rewards, you will receive a confirmation of the redemption via email or within your credit card account. Depending on the redemption option, you may receive the reward immediately, or be delivered by mail or electronically.

8. Monitor your rewards balance: Keep track of your remaining rewards balance after redemption. Ensure the rewards have been correctly deducted and any corresponding credits or benefits have been applied to your account.

Remember, the specific steps and options for redeeming credit card rewards may vary depending on the issuer and the rewards program. It’s always advisable to refer to the issuer’s guidelines, terms, and customer service for the most accurate and up-to-date information regarding the redemption process.

FAQs

Yes, you can often use a rewards credit card to pay bills, depending on the bill payment options available and the policies of the billers. Here are a few common methods for using a rewards credit card to pay bills:

  • Online Bill Payments: Many billers, like utility companies, telecom providers, and credit card issuers, offer online bill payment portals. These portals usually allow you to add your credit card as a payment method. You can then enter your credit card details and make payments using your rewards credit card.
  • Automatic Bill Payments: Some billers allow automatic bill payments, where the bill amount is automatically charged to your credit card each billing cycle. Check with your biller to see if they accept credit cards for automatic payments and if any fees are associated with this service.
  • Bill Payment Services: Some third-party bill payment services allow you to pay various bills using a credit card. These services typically charge a convenience fee for processing the payment, so consider the fee in relation to the rewards you’ll earn to ensure it’s worth it.

It’s important to note that while many billers accept credit card payments, some may not. Additionally, some billers may charge convenience fees for credit card payments, which could offset the value of the rewards you earn. Before using your rewards credit card to pay bills, consider the following:

  • Check if the biller accepts credit card payments and if there are any associated fees.
  • Assess the rewards rate of your credit card and the potential rewards you’ll earn for bill payments.
  • Evaluate the convenience fees (if applicable) and compare them to the rewards you’ll earn to determine if it’s financially beneficial.

Remember to pay off your credit card balance in full each month to avoid interest charges. Using a rewards credit card to pay bills can be a convenient way to earn rewards on your regular expenses. Still, it’s important to weigh the benefits against any associated fees or interest costs.

In general, credit card rewards are not considered taxable income. The Internal Revenue Service (IRS) treats credit card rewards as a rebate or discount on a purchase rather than income. Therefore, you usually don’t have to report credit card rewards as taxable income on your federal income tax return.

However, there are a few exceptions and special circumstances where credit card rewards may be subject to taxation:

  • Sign-Up Bonuses: If you receive a sign-up bonus for opening a new credit card account, the bonus may be considered taxable income. If the value of the bonus exceeds a certain threshold (typically $600 in a calendar year), the credit card issuer may issue a Form 1099-MISC to report it to the IRS, and you would need to include it as taxable income on your tax return.
  • Rewards for Business Expenses: If you use a personal credit card for business expenses and receive rewards for those purchases, there could be potential tax implications. Sometimes, the IRS may consider the rewards as business income, and you may need to report and include them in your business tax filings. Consult a tax professional for guidance on this matter.
  • Rewards from Bank Accounts: Some banks offer rewards for opening and maintaining certain bank accounts. These rewards may be subject to taxation, and the bank may issue a Form 1099-INT or Form 1099-MISC to report them to the IRS.

It’s important to note that tax laws can change, and individual circumstances may vary. It’s always recommended to consult with a qualified tax professional or refer to the IRS guidelines for the most accurate and up-to-date information regarding the tax treatment of credit card rewards in your specific situation.

Yes, rewards credit cards can affect your credit score positively and negatively. Here are a few key ways in which rewards cards can impact your credit score:

  • Payment History: Your payment history is a significant factor in determining your credit score. Making on-time payments on your rewards credit card can help build a positive payment history, improving your credit score. Conversely, late payments or defaults can harm your score.
  • Credit Utilization: Credit utilization refers to the percentage of your available credit that you are currently using. It is calculated by dividing your credit card balances by your credit card limits. Using a rewards credit card responsibly and keeping your balances low relative to your credit limits can positively impact your credit score. High credit utilization, on the other hand, can lower your score. Keeping your credit utilization below 30% is generally recommended for optimal credit health.
  • Length of Credit History: The length of your credit history is another factor influencing your credit score. If you have had a rewards credit card for a long time and maintain a positive payment history, it can have a positive impact on your credit score. It demonstrates your ability to handle credit responsibly over an extended period.
  • New Credit Inquiries: When you apply for a rewards credit card, the issuer typically performs a hard inquiry on your credit report. Too many hard inquiries within a short period can negatively impact your credit score. It’s important to be selective when applying for new credit cards to avoid excessive inquiries.
  • Credit Mix: Having a diverse mix of credit accounts, including credit cards, loans, and mortgages, can positively impact your credit score. By having a rewards credit card as part of your credit mix and managing it responsibly, you can contribute to a healthier credit profile.

Rewards credit cards are not necessarily harder to get than other credit cards. The approval process for a rewards credit card is typically based on the same criteria as other credit cards, which include factors like your credit score, income, employment history, and existing debts.

However, some rewards credit cards may have higher eligibility requirements than basic or entry-level credit cards. Premium rewards cards, like those offering extensive travel benefits or exclusive perks, often target consumers with higher credit scores and income levels. These cards may have stricter criteria and require a more robust credit profile to qualify.

Furthermore, some rewards credit cards may have specific restrictions or limitations based on the issuer’s policies or the type of rewards program. For example, certain travel rewards cards may require a minimum credit score or have specific income requirements due to the rewards’ higher potential value. While some rewards credit cards may have slightly stricter requirements, there are plenty of rewards credit cards available that cater to a wide range of credit profiles and income levels.

Before applying for a rewards credit card, it’s advisable to check the issuer’s eligibility criteria, review your credit score, and ensure you meet the basic requirements. If you have a limited credit history or lower credit score, you may want to consider credit cards specifically designed for building or rebuilding credit before applying for rewards cards with more stringent requirements.