All major credit card companies commonly offer rewards credit cards, but financial experts are often divided on their merit. Some say all credit cards are not worth the potential cost, rewards or not, while others advise that the benefits could far outweigh the costs if you properly use credit card rewards to your advantage.
We believe that rewards credit cards can be worth it if you have the knowledge and tools at your disposal to use them strategically. Most people don’t know how to make the most of the perks rewards cards offer. Knowledge is power, especially when it comes to your finances.
Understanding the benefits of a rewards credit card as well as its potential drawbacks will enable you to save money and get the most value out of your rewards.
What Is a Rewards Credit Card?
Rewards credit cards allow you to earn rewards of different kinds for purchases you make using the card. Most major credit card companies offer several types of reward credit cards to their customers, and they are only becoming more popular as time goes on.
Rewards cards can generally be divided into three categories based on what rewards are earned and how you earn them: points cards, travel credit cards, and cash back reward credit cards.
Cash Back
Cash back rewards are exactly what they sound like. Not to be confused with a cash advance, these credit cards are the most straightforward rewards card type; you earn back a percentage of each qualifying purchase you make using the card. For example, if you used a 3% cash back rewards card on a $300 qualifying purchase, $9 in rewards.
Cash back rewards cards are popular because people often think about them as free money. Of course, it is slightly more complicated than that. However, if you are someone who has varied spending habits and handles your credit card bill responsibly at the end of each month, the cash back rewards could be well worth it.
Credit Card Points
Points cards function a little differently than cash back rewards. Instead of earning dollars on your qualifying purchases, you earn points every time you use your credit card. Usually, you earn a point for every dollar you spend, but many rewards cards give you bonus points when you pay within specific categories.
Using your rewards credit card in a bonus category like dining, groceries, or gas could double or triple the credit card points earned. After earning points sufficient for earning rewards, there are usually several redemption options to choose from. The redemption options for the points earned using a card with a bonus category will frequently include rewards towards purchases within that category.
Suppose your everyday purchases are heavily concentrated in a particular area. In that case, a points card with that specific bonus category could maximize your rewards, allowing you to get more value out of the money you spend.
Travel Miles
Travel rewards credit cards work similarly to points-based cards, but rather than earning points for each dollar spent, you earn miles for purchases you make using the card. Perfect for frequent travelers, a travel credit card allows you to redeem all miles and points for travel-related spending like hotel rooms, airline tickets, and rental cars.
Many travel credit cards from major credit card issuers offer extra perks like free checked bags and VIP lounge access. Earning enough miles could even give credit cardholders access to generous rewards like free flights.
If you already travel often for work or family, a travel credit card could be an excellent way to get the best rewards for your credit usage and even a free flight.
How Do Credit Card Rewards Work?
Whether you choose cash back, points-based, or travel miles, all credit card rewards essentially work the same: you spend money using the card to get rewards that will unlock all manner of perks from cash to discounts on other purchases. The finer details like how much you receive in cash back or collect points vary greatly depending on the credit card and the financial institution.
Typically, you will need to hoard a certain amount of points in order to redeem them for travel spending, cash back, or otherwise. But once you have saved enough points, it should be relatively simple to redeem the rewards you have through the credit card issuer’s website. Most credit card companies have a redemption portal where you can see how many credit card rewards you have earned and choose how you wish to use them.
Cash back rewards cards often allow you to convert your rewards into statement credits. Rather than deposit your cash back into a bank account, a statement credit will put the money you earned towards your credit card bill.
Choosing a Rewards Card
If you believe you could benefit from a rewards card, you might be unsure how to determine which type of card would be best for you. Choosing the right rewards credit card is tantamount to making them worth it.
Most reward credit cards require you to have a good or excellent credit score. If you don’t have at least good credit, you will likely find it hard to qualify. Once you are sure you have good approval odds, you will want to pick a card that fits your lifestyle and allows you to save money on annual fees.
Pick a Card That Matches Your Lifestyle
Picking a card that matches your spending habits is vital to getting the most out of your credit card rewards. If you travel regularly, a travel credit card will be the best way to stretch your travel budget. On the other hand, if you barely travel, you’d get very little out of a rewards card geared towards travel, making it not worth it.
If you do a lot of driving, then a card that gives you points for spending at gas stations could be perfect. The same can be found in cards that offer bonus points in the categories of groceries or restaurants. If you have highly varied spending habits, a straightforward cash back credit card could be the best fit. Find a card that already fits with your spending and your budget.
Find a Card With a Low or No Annual Fee
Unless you are a big spender, you will want to try to find a credit card with a low annual fee or, if you can, no annual fee at all. Annual fees can end up costing you a considerable amount of money. If you don’t spend enough money on purchases to earn points to make up for those costs, you could end up in a situation where you pay significantly more for your credit card rewards than you make.
You shouldn’t push yourself to spend more money than you usually do to make up for the annual fee you need to pay. Therefore, if you are an average spender, you will want to locate the credit cards with little to no annual fees. That way, you can earn credit card rewards that entirely cancel out the annual fee without making other purchases that are unnecessary.
When picking out the credit card you want to apply for, read the fine print so you can know exactly what fees are involved.
Make Rewards Credit Cards Work for You
Two significant concerns about rewards credit cards cause some financial experts to discourage their use. The first concern is that you will pay more money in fees than you will earn in rewards, and the second is that you will spend more money than you would usually to get enough points to make the credit card worth it.
Fortunately, there are strategies you can use to make your credit card rewards work harder for you to get as many benefits out of your rewards card as possible without spending money that you don’t need to.
Here are a few ways that you can better take advantage of your rewards credit cards worth, so you get significantly more bang for your buck:
You Were Already Planning a Large Purchase
Wait to apply for a rewards credit card until you have a substantial purchase to make. If you’ve been saving money to cover the costs of this big deal buy, then you can use a brand new reward card to make the purchase and pay off the card balance immediately afterward. This allows you to get all the points you can without paying interest.
Only applying for rewards credit cards when you already have money set aside for a specific thing prevents you from making purchases you don’t need simply to earn enough points to make the card worth it.
Pay Off Your Balance in Full Every Month
The best way to get the most out of a rewards credit card is to pay off your entire balance in full every single month. When interest is tacked onto your credit card statement at the end of the month when you have a remaining balance, you could end up in a situation where you pay more in interest than you get in rewards. This could worsen if you were to consistently make late payments, as late fees could cancel out any rewards or cash back you earned.
Making sure to pay off all the purchases you make using the card at the end of the month could make the cash back or points you earn actually feel like free money.
Paying all your credit cards in full every month could also do wonders for your credit report. Consistently getting your account to zero balance will improve a bad credit report or any authorized user attached to your credit account.
Take Advantage of an Introductory APR
Multiple cards with rewards programs offer sign-up bonuses that could allow you to avoid interest rates on your purchases after your account opening. If you can’t quite pay your balance every month right now, you could find a card with a 0% introductory APR for the first year or two.
Taking the need to pay interest rates out of the occasion for the first year could make it possible to get rewards on all your purchases without needing to cover any fees. That way, you are getting every little bit of benefit out of your purchases that you possibly can.
There are plenty of financial products out there that promise all manner of fanciful monetary rewards. However, it’s essential to keep in mind that the offer of free stuff is often not as simple as it is made to appear for advertising purposes. But if you are smart and know how to use a rewards credit card strategically, you can make it well worth it.
References:
Are Credit Card Rewards Worth It or Not?
Four Ways You Can Tell If Rewards Are Worth It For You
