Use them if: You always pay your debts every month and have good credit
Advantages: Rewards credit cards return to you a certain percentage of your purchases, usually 0.25%-5%, depending on the card and type of purchase. Think of a rewards credit card as a perk for paying your bills responsibly.
Disadvantages: Rewards credit cards generally have a higher APR. If you bank with a credit union to avoid a high interest rate, you’ll probably see less generous rewards. Should you find yourself carrying a balance month-to-month, you’ll probably pay out more in interest than you’ll earn in rewards.
There are a few major types of rewards credit cards:
Travel rewards: These cards usually give bonus rewards (2-5%) for spending on airlines, hotels and other travel expenses, and pay out in travel miles that can be redeemed for additional travel. Some will only earn and give rewards on a specific airline or hotel, while others are broad enough that you can receive a credit towards any sort of travel expense. The high-end cards come with travel perks like lounge access or waived baggage fees.
Gas credit cards: Gas credit cards, as the name implies, earn extra rewards on gas purchases. Some give rewards only when you buy at a certain station, while others have monthly rewards caps. However, you can find cards that give up to 5% rewards on gas. Usually, you can redeem your rewards in the form of gift cards or cash back and aren’t limited to gas station gift cards.
Cash back credit cards: Cash back credit cards, or cash rewards credit cards, have a wider range of bonus categories. As you can probably tell, they pay out their rewards in cash: a simple check mailed to you, or in some cases a credit to your account.
What to look for:
- What kind of spending is rewarded? You can find cards with extra rewards at certain stores, for types of spending like travel or dining, or cards with one flat rewards rate.
- How are the rewards paid out? If you usually fly on American Airlines, getting rewards in Southwest miles won’t be very useful.
- Are there rotating bonus categories? Some cards give 5% rewards in categories that change every quarter. You must re-enroll in the program every quarter to earn rewards.
- Is there a rewards cap or spending threshold? Some credit cards have a spending threshold – for example, you only earn your full rewards on spending in excess of $3,000 a year. Others limit the amount of rewards you can earn in a year or quarter.
- What are the perks? Premium credit cards have snazzy benefits, especially those relating to travel, like rental car or trip cancellation insurance.
- Is there a foreign exchange fee? Many high-end travel rewards cards waive the usual 3% fee charged when you spend money abroad.
- Do you need excellent credit? The best of the best rewards cards require high FICO scores.