Different Types of Rewards Credit Cards

By Courtney Dodson

When comparing credit cards, it’s important to first consider your goal. Why do you need the credit card? For example, someone who wants to make a large purchase that can’t be paid off immediately should prioritize finding a card with a low interest rate. A person who wants to build credit but plans to pay off the balance in full each month can focus on another feature, like finding a card with no annual fee or a great rewards program. Most people choose a credit card based on a combination of three criteria: interest rate, fees and penalties, and incentives.

Comparing card features

A credit card’s interest rate, or annual percentage rate (APR), is one of its most important factors. This is the price you’ll pay to borrow money, presented as a yearly percentage. If you pay your credit card balance in full every month, you can avoid paying interest altogether. If you can’t afford to pay your balance in full, however, it’s preferable to have a credit card with a low APR. Generally, the higher your credit score, the lower your interest rate will be, so make sure you know what your credit is like before applying for a card. Some cards also offer promotional introductory rates as low as 0%, but then jump to a higher rate once the introductory period is over. Read the fine print in your credit card agreement to make sure you understand the terms of the card you’re choosing. 

Fees and penalties are another important factor that can vary among credit cards. Some of the most common include the annual fee, late fee, balance transfer fee, foreign transaction fee, over-the-limit fee, and more. Look for a card with reasonable fees and penalties and familiarize yourself with the different types to avoid them when possible.

Many credit cards offer incentives that make them more attractive. This can be a sign-up bonus (usually contingent upon a certain amount being spent during an introductory period) or a rewards program. Rewards programs allow you to earn rewards by accumulating points for each purchase you make. Choose a credit card with a rewards program that benefits your lifestyle—for example, a frequent traveler may opt for a card that offers miles to save money on business trips or vacations.

Rewards card options

Credit card rewards programs usually fall into three categories: miles, points, or cash back. As mentioned above, a travel rewards card offers miles as an incentive for spending, which can then be redeemed for airline tickets through a frequent flier program. This is beneficial for anyone who travels regularly, whether for a business or personal agenda. 

On credit cards offering point-based rewards systems, the points you earn per purchase can be redeemed for things like statement credit, gift cards, merchandise, and travel. Gift cards earned through a credit card rewards program are often discounted, so your dollars can stretch further if you choose to redeem your points for gift cards. A point-based rewards program is generally beneficial for all lifestyles, since a broad spectrum of benefits is available. 

Cash-back rewards cards sometimes work by allowing you to earn a percentage of cash based on the dollars you spend. Other times, they also use a point-based system that lets you redeem your points for cash. While getting cash back is the most straightforward option available, points and miles can do more to help you maximize your rewards.

Pros & cons of rewards cards

The benefits of signing up for a rewards credit card are, of course, the rewards! However, it’s important to evaluate whether rewards that sound great are truly worth opening the card. If you choose a card based on its cash-back rewards, for example, but it also comes with a high APR, could you end up paying more in interest charges than you earn back in rewards? Similarly, you should check to make sure your credit card’s annual fee is not more than the rewards you accumulate. Rewards credit cards often have higher interest rates and fees than other types of cards, so be sure to weigh your options carefully.

Some credit cards also offer rewards programs that are surprisingly difficult to utilize. If the points you earn can expire, are capped at a certain threshold, or require a minimum point-balance before they can be redeemed, you may want to think twice about choosing that card. Particularly if you have multiple credit cards, it can be tough to keep track of different rewards point balances and rules—and you don’t want your rewards to go to waste.
Have any other questions regarding credit cards? Contact your financial institution with help from Kredit.

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