Rewards Credit Cards

A rewards card is a credit card that gives points, miles or cash back, either for making purchases with the card or as a bonus for meeting a spending threshold in a certain time period. People with any level of credit can qualify for a rewards card, but you’ll need at least “good” credit to be approved for the best credit cards with rewards. Rewards cards also have a wide range of annual fees. Some of the best rewards cards have no annual fee, while others charge hundreds of dollars per year.

What you should know about rewards cards:

Rewards Currencies

Credit card rewards come in three basic currencies – cash back, miles and points. Cash back credit cards give you a certain percentage of your purchases back. Miles credit cards offer miles that are either tied to a specific airline or are generic miles that can be used for any travel-related expense. Points credit cards either offer hotel points or generic ones that can be redeemable towards various products and services. Generic points and miles credit cards make for the best travel credit cards on the market.

Rewards Program Structure

Regardless of the rewards currency that your rewards credit card offers, you will generally earn them as initial/sign-up bonuses (often offered as a lump-sum rewards bounty after spending a certain amount in a specified time period), spending-based rewards (flat or different earning rates for various sending categories) or anniversary bonuses (such a free hotel nights, free flights, or a certain amount of points, miles or cash back each year).

Redemption and Value

Common ways of redeeming your rewards include statement credits (crediting your rewards balance to your account), checks, gift cards, merchandise, charities and special experiences. All these redemption methods will have different values, so your goal should be to redeem your rewards in a way that get you the highest dollar-value. While cash back is straightforward, always consider what you can redeem miles and points for and what they’re ultimately worth.

Earning limits

Some cards implement monthly, quarterly or annual earning limits in certain spending categories or across. Always make sure to check what they are and consider whether they may affect your situation.

Rotating Categories

Some credit cards offer certain earning rates for spending categories that may change in a given time frame (e.g.: quarterly) and you have to sign up to earn that rate whenever that happens.

Devaluation and Expiration

Points and miles may have certain plateaus you have to reach in order to redeem them for goods and services. These plateaus aren’t guaranteed to be static and if your credit card issuer increases them, your accumulated points/miles may be worth less by the time you can redeem them. In terms of rewards expiration dates, most issuers have done away with them, but always check to make sure that is the case.

In addition to paying for purchases with rewards credit cards, consumers can save money using a loyalty rewards card when shopping. Many resorts, hotels, and retailers have loyalty programs, and they’ll often have a corresponding loyalty card or number that you can present when you make a purchase. CVS and Office Depot are two retailers with good loyalty card programs. The loyalty card keeps track of your eligible purchases and any rewards you’ve earned. Loyalty cards aren’t credit cards, but they are a good way to rack up rewards for hotels or retailers you visit often.

Store credit cards and co-branded credit cards – which are affiliated with specific retailers and organizations – can also be used in conjunction with loyalty rewards cards to help you save as much as possible with your favorite brands.

Finally, you might hear gift cards referred to as reward cards, especially those awarded as a prize or incentive, or as credit in lieu of a refund.

Rewards credit cards are worth it if they will save you more than they cost you, all things considered. The best rewards credit cards are worth more than $1,000 in savings for the average person over the first two years of use, after annual fees. But you need good or excellent credit to get the most worthwhile rewards cards. Things aren’t as clear-cut for people with lower scores. In addition, rewards credit cards are only worth it for purchases that you can afford to pay off fully by the due date each month. Credit card interest rates are much higher than credit card rewards rates, so it’s best to use a low interest card for balances that you’ll carry from month to month.

When determining if a rewards credit card is worth it or not, you have to weigh the worth of the rewards against the cost of the card. If the card has no annual fee and you plan to pay the bill in full every month, it’s pretty easy to decide the card is worth it. However, you’ll often get the best rewards and biggest signup bonuses from cards that do have annual fees. In that case, you just have to crunch the numbers to make sure you’ll get your money’s worth.

Regardless of which rewards card you choose, be sure to understand how you can earn rewards most efficiently. Some cards have higher rewards rates for specific categories, and some give a flat rewards rate that you earn on all purchases. The fastest way to earn credit card rewards is through signup bonuses. Many of the top rewards cards come with signup bonuses that you can get for meeting a minimum spending requirement in the first three months. The signup bonuses are usually worth several hundred dollars, enough to cover the cards’ annual fees for years. And you can get them for spending money you were already planning on spending.

The biggest pros and cons of rewards credit cards are savings with every purchase and extra secondary benefits, on the positive side; and the potential for devaluation and earning caps, on the negative side. Rewards credit cards can be lucrative when used with precision. But they can also end up costing more than they benefit you if you pick the wrong card or carry a balance from month to month.

Rewards credit cards are known for offering 1% to 5% back on most purchases, often supplemented by an initial rewards bonus potentially worth hundreds of dollars. Many rewards credit cards also have $0 annual fees, and some even provide the opportunity to save on finance charges with 0% APR periods.

But rewards cards have their pitfalls, too. Although cash back is straightforward to redeem, there can be a minimum redemption amount, depending on the card. Points and miles, on the other hand, have different redemption values from card to card. To add to the general confusion surrounding rewards programs, credit card companies can change the value of a point or a mile anytime they wish - and usually they don’t increase the value.

Credit card rewards can also expire based on any criteria the card issuer decides, including account inactivity, a missed payment, or simply after a certain period of time. That’s why it’s important to read the card’s terms and conditions before applying.

Biggest pros and cons of rewards credit cards:

Overall, rewards credit cards are mostly a good deal, as long as you use them responsibly by not spending more than you can afford to pay each month. It’s important to pay your bill in full every month, because any money saved in rewards can be negated easily by paying interest.

Devaluation is a problem with points and miles, too, so redeem your rewards often to decrease the chance of having them become less valuable. And if you get a rewards card with an annual fee, make sure the perks outweigh the fee.

There are three types of credit card rewards: points, miles and cash back. Rewards credit cards are also targeted to three main groups: students, small business owners and people with above-average credit. Although there are differences between credit card rewards currencies, and the ways in which credit card companies dole them out to different groups, the major types of credit card rewards all work pretty much the same way. You’ll earn rewards for every purchase you charge to the card – sometimes at a flat rate on all purchases, and other times with earning rates that vary by spending category. It’s also possible to earn rewards for doing things like spending a certain amount in the first few months, referring a friend or adding an authorized user.

Most credit cards with rewards are “general-purpose” cards, which are not fundamentally linked to any particular company, other than the card issuer and card network. In addition, there are some “co-branded” rewards credit cards that offer extra points, miles or cash back and other incentives when you use the card with an affiliated retailer or organization. These cards are partnered with a card network such as Visa or Mastercard, which means cardholders can use them (and earn rewards) anywhere the network is accepted.

Co-branded cards are different from store cards, which are issued by banks but are not linked to any of the major card networks. This means store cards only let you make purchases and earn rewards with whichever retailer is associated with the card.

Types of Credit Card Rewards

Points

Credit cards with rewards points generally give at least 1 point per $1 spent. You can redeem points for hotel stays and other travel expenses, statement credits, gift cards or merchandise, depending on the card. Points cards are sometimes affiliated with hotel chains.

Miles

Credit cards with miles are travel oriented, often affiliated with a specific airline. Rewards typically start at 1 mile for every $1 you spend. Miles can be redeemed for airfare, other travel expenses, gift cards, cash or merchandise. Cards co-branded with a particular airline may reward you with seat or room upgrades, early boarding on flights, free checked bags and more.

Cash Back

Credit cards with cash back rewards return a portion of each purchase cardholders make, usually at least 1%. You can redeem cash rewards as a check, direct deposit to your bank account or statement credit, depending on the card. Some cash back rewards can also be redeemed for gift cards and merchandise through the issuer’s online rewards mall.

You’ll need good or excellent credit to qualify for the best rewards credit cards. Many also come with annual fees to offset the costs of their rewards programs. And some cards offer sign-up bonuses that require meeting a minimum initial spending requirement.

For more information, check out WalletHub’s Credit Card Rewards Guide.

The best way to choose a rewards credit card is to narrow down your choices to what your credit score qualifies you for, then compare the rewards rates and costs of the remaining options. Next, pick the credit card with the highest expected rewards earnings, based on your spending habits, minus any annual fees.

In addition to net rewards value, there are many secondary features that might influence you to pick one card over another when choosing a rewards credit card. For example, you may want a card that gives a certain type of rewards, whether cash back, points or miles. You may also want qualities like no annual fee, no foreign transaction fee, introductory financing on purchases, or perks with certain airlines or hotels. How long you want to keep the card and where you want to use it will factor into your decision as well.

How to Choose a Rewards Credit Card

1. Eliminate cards you can’t qualify for. Check your credit score, then narrow down your options to the cards you can qualify for with that score.
2. Decide what kind of rewards you want. It’s clear how much cash back rewards are worth. Cash back can’t be devalued, either, unlike points or miles. But many points and miles cards offer increased redemption value toward travel.
3. Think about where you want to use the card. Some credit cards give extra rewards at certain merchants or types of merchants, so you might look for a card that caters to your biggest purchase categories. Or you might want a card with a good flat earning rate on everything.
4. Consider how long you want to keep the card. If you’re only planning to keep the card for a year, initial bonuses and promotional financing will probably factor heavily into your decision. If you’re looking for a card for the long haul, terms like fees and ongoing rewards rates are more important.
5. Compare offers based on expected net value. Calculate the amount of rewards you expect to earn in a year or two with each card you’re considering, based on your spending habits. Then, subtract the cards’ annual fees to see which one provides the most value.
6. Compare perks. There are all kinds of features that might sway you to pick one rewards card over another. Some examples are $0 foreign transaction fees, big initial bonuses, 0% introductory APRs, credits for certain types of purchases, and airport lounge access.

At the end of the day, the best way to choose a rewards credit card is to figure out what you want out of a card and then pick the credit card offer that most closely matches that description. And you can use WalletHub’s editors’ picks for the best rewards credit cards as a starting point to do just that.

In addition, you can use WalletHub’s CardAdvisor tool to get credit card suggestions based on your answers to a few simple, anonymous questions. Or, you can create a free WalletHub account to get access to personalized credit card recommendations based on your WalletHub profile and credit report info.

To maximize credit card rewards, keep it simple. Choose the right card by sticking with rewards you know you will use. Understand the terms your rewards program. Spread expenses across best rewards cards. And above all else, pay your balance in full every month.

The purpose of a rewards credit card is to get the most out of the benefits the card offers. Otherwise, it’s just a regular credit card; and not a cost-effective credit card, to boot. Many of the best rewards cards on the market often come with an annual fee to help cover the cost of the rewards – rewards you may not be taking full advantage of. So rather than throwing away money on your rewards card, follow a few simple steps, and let your rewards card pay you for responsible usage.

Here’s how to maximize credit card rewards:

• Stick with rewards you’ll use. There’s no point in investing in an airlines credit card with a hefty annual fee if you fly only once a year. If you’re a frequent traveler, dine out regularly, or spend a lot on groceries, find a rewards card that will pay you for those purchases. And if your hotel expenses make up most of your spending, check out the best hotel credit cards. If you want something less complicated, get a card that pays a flat cash back rate on all of your purchases. Check out our editors’ picks for the best cash back credit cards.
• Know the card’s rewards terms. Make sure any spending requirements for sign up bonuses are attainable. Familiarize yourself with the card’s redemption rates. Rewards come in three main currencies: cash back, points, and miles. While cash back rewards are straightforward as they consist of a dollar-value percentage of your purchases, miles and points are more diverse. Credit card points can be either hotel points or generic ones that can be redeemable towards various products and services. And miles are either tied to a specific airline or they’re generic miles that can be used for broader travel experiences. Common ways of redeeming rewards include statement credits, checks, gift cards, merchandise, charity and more. Rewards points and miles are often worth less when redeemed for one category over another.
• Use multiple cards to get the best rewards. This is known as the Island Approach. If you have a card that earns 5 points on gas purchases, make that your gas-only card. If your airline card has a minimum spending requirement for 50,000 bonus points, put all of your expenses on that card.
• Pay your balance in full. When you keep a balance on a rewards card, interest charges may cancel out any rewards earned. If you’re after financing options, check out our editors’ picks for the best low interest credit cards. And avoid any late or missed payments. Not only will a late fee further eat into your rewards, but you could end up forfeiting any rewards earned altogether.

Try redeeming reward miles or points periodically rather than stockpiling them. Rewards generally don’t expire, but in some cases, you could lose points if there’s no activity on your rewards account. And if you close your account, you will lose all of your earned rewards.

Exactly how you redeem credit card reward points varies by credit card company, but most credit card users can redeem reward points online through their account summary page. Some credit card issuers also let you redeem rewards over the phone. Credit card reward points may be redeemable for cash back, travel purchases, gift cards, and more, depending on the card.

Once you redeem your credit card reward points, they’ll be subtracted from your rewards balance immediately and your account will be credited within 1-3 weeks, if applicable. In some cases, reward points will expire if you do not use them by a certain time.

How to Redeem Credit Card Reward Points:

1. Log in to your online account and head to “Account Summary.” Specifics will vary by issuer, but your rewards will usually be featured on a main account page.
2. Click on “Rewards Balance.” The exact wording may differ depending on the issuer. Once you click on your rewards balance, you’ll be taken to a page with your total amount of unredeemed rewards, and information about your redemption options.
3. Select how you’d like to redeem your rewards. You may be able to redeem reward points for travel purchases, cash back in the form of a check or statement credit, merchandise, or gift cards, depending on the rewards card.
4. Redeem your rewards. Once you redeem your credit card reward points, the points will be deducted from your rewards balance immediately. If you’re redeeming for statement credits or covering past purchases, your account will usually be credited within a week. If you redeem your points for gift cards or merchandise, you can expect them to arrive in the mail within 2-3 weeks.

While many rewards cards will let you choose from multiple redemption options, you’ll usually get the most value with one in particular. For example, travel reward credit cards will often give you the most bang-for-your-buck when you redeem your points for travel purchases, and your rewards may be worth less if you redeem them for cash back or gift cards.

On average, credit card reward points are worth 1 cent each. Most major credit card issuers, like Chase, Capital One and American Express, advertise that your points will not expire as long as your account remains open. But you should check the exact terms and conditions of your specific credit card to make sure you don’t lose any rewards you’ve earned.

Credit card reward redemption works a little differently for every issuer. But generally, you can redeem your rewards online or by calling your issuer’s customer service. Depending on your card, you may be able to redeem for travel, statement credits, paper checks, gift cards, merchandise and more. And you may get more value when redeeming for some things than others. The Chase Sapphire Reserve® card, for example, gives you 50% more value for your points when you redeem for travel.

Some credit card companies also have special rules and restrictions for reward redemption. For example, you might be required to earn a certain amount of rewards before you can redeem. Or you might have to redeem rewards in certain increments. In rare cases, like with the Costco Anywhere Visa® Card by Citi, you might even receive your earnings just once per year.

Given how much reward redemption procedures can vary from credit card to credit card, it’s good to read a card’s terms and conditions carefully before applying.

Here are the basics of credit card reward redemption:

• Credit card users can usually redeem rewards for travel, cash back (check or statement credit), gift cards, merchandise and more.
• Most credit card companies let customers redeem rewards online or over the phone.
• Each credit card company has its own reward redemption rules. Rules may dictate when you can redeem rewards, for example.
• Your credit card’s terms and conditions will include information about reward redemption. Be sure to read them in detail.
• Some scammers attempt to pose as a credit card “reward redemption center” to get your credit card details. Don’t give personal information to unsolicited callers.

There is a common phone scam where someone claims to be from the “Reward Redemption Center.” If you get this call, hang up right away and block the number. Don’t give them any personal information. The caller is trying to commit fraud, not to give you any real reward. Here’s how the scam works: they say you have won a free gift card, but you need to pay for shipping to get it. They do this to get your credit card number, then use it for fraudulent purposes.

So, the bottom line is don’t trust anyone who calls saying they’re from the “Reward Redemption Center.” Your credit card issuer will never call you like this. And if you’ve earned rewards on your card, you can take care of reward redemption on your own. The only true way to redeem rewards you’ve earned is directly through your credit card company.

Credit card rewards are not taxable in most cases. The IRS views credit card rewards the same way they view discounts, and discounts aren’t taxable. Rewards credit cards give points, cash back, or miles on purchases, which you can then redeem for statement credits, gift cards, merchandise, and travel expenses. Because of that, it’s like you’re getting a small discount every time you make a purchase.

There are some situations in which credit card rewards may be considered taxable income. Many credit cards offer a signup bonus for new cardholders that is rewarded once they meet a minimum spending requirement. For example, you might get $150 for spending $500 within the first three months. If you receive a signup bonus for meeting a spending requirement, that bonus is not taxable. However, if you receive a bonus without meeting any spending requirement, then it is considered taxable income. To make it simple, if you’ve done nothing in exchange for the rewards, they’re considered taxable.

Currently, though, there aren’t any credit cards offering bonuses for nothing in return – at least any you have to worry about tax-wise. Even credit cards that don’t have a high minimum spending requirement usually require that you make a purchase before receiving the bonus. Others just give you a gift card, which isn’t considered taxable income, either.

When it comes to anniversary and referral bonuses, lines aren’t as clearly drawn. Some anniversary bonuses require that you spend a certain amount each year to receive the bonus, or renew the card by paying the annual fee. In these cases, an anniversary bonus clearly falls into the “not taxable” category. Referral bonuses, on the other hand, likely will be considered taxable income. American Express and Chase even send out a Form 1099-MISC to file with the IRS after cardholders earn referral bonuses.

Business credit card rewards differ slightly in terms of whether they’re taxable or not. While the actual rewards you get from your business credit card aren’t taxable, the IRS will expect you to subtract them from the business expenses you report. You’ll have to consider the rewards as discounts on your business expenses, which will reduce the amount you’re able to deduct on your taxes.

To sum things up, the only times you have to be concerned about credit card rewards and taxes are if you have a business credit card or you receive a bonus without doing anything to get it. Other than that, you can enjoy the rewards you earn without a second thought.

The difference between cash back and points is that the former is the most versatile type of credit card rewards, as it can be redeemed for anything, and there’s never any doubt about how much it’s worth. Points, on the other hand, have a value set by the credit card company and tend to be worth the most when redeemed for travel. Credit card companies won’t always clearly disclose points values, and those values can change over time. It’s possible that points could be worth 1 cent apiece one day and 0.8 cents each the next.

You can spend points for many different things. Usually, you can trade them for travel, gift cards, unique experiences, charitable donations or even cash. There are no restrictions on what you can use cash for. You can typically redeem cash back for a statement credit, paper check, or direct deposit to a bank account. One thing credit card shoppers should watch out for are cards advertised as offering cash back that really provide points. For example, the Chase Freedom Flex℠ offers “5% cash back” in certain bonus categories. But what it actually gives is 5 Chase Ultimate Rewards points per $1, which cardholders can then trade for cash back at a rate of 1 cent each.

Cash Back vs Points:

• Good cards overall: Citi® Double Cash Card – 18 month BT offer for cash back. Chase Sapphire Preferred® Card for points.
• Initial bonus: Bank of America® Customized Cash Rewards credit card - $200 for spending $1,000 in the first 90 days. IHG® Rewards Club Premier Credit Card for points - 150,000 points for spending $3,000 in the first 3 months.
• Earning rate: Usually at least 1% cash back or 1 point per $1 spent.
• Devaluation: Points can be devalued by the issuer, while cash back can’t.
• Redemption options: Statement credit, check or deposit for cash. Travel, merchandise, gift cards, cash and more for points.
• When it’s the best choice: Points for frequent travelers. Cash back for everyone else.

Let’s take a look at two high-profile cards in a battle of cash back vs. points.

Citi Double Cash Card tops the cash back offerings with 2% cash back on all purchases and an introductory APR of 0% for 18 months on balance transfers, with a 3% (min $5) balance transfer fee. It also chases a $0 annual fee and requires good credit to get.

But if you’re a frequent traveler, Chase Sapphire Preferred is a more attractive option. It gives 2 points / $1 spent on travel and dining purchases and 1 point / $1 on everything else. It has an initial bonus of 100,000 points for spending $4,000 in the first 3 months. This card’s points are worth 1 cent each toward cash back or gift cards or 1.25 cents each toward travel. There’s a $95 annual fee and the card requires good credit.

For both cash back and points cards, you can expect to lose your rewards if your account closes for any reason. Most cards don’t let your rewards expire over time. But Citi Double Cash Card’s cash back expires if you don’t use your card for 12 months. And on points cards alone, your points can be devalued if the issuer decides to charge more points for its rewards. So, frequent redemption is essential.

So, the bottom line is that frequent travelers should check out points cards. Otherwise, cash is king.