Earning money by spending money is a good deal -- and it’s one of the major ways credit card companies entice customers to sign up for credit cards. The more you spend, the more you earn.
Using a credit card to earn rewards and build or improve your credit score can be a win-win. But if you don’t know how to use a credit card strategically, there are significant risks. The world of cash back, reward miles and complicated redemption processes can lead you to spiraling interest payments and late fees.
There’s no shortage of credit card offers and welcome bonuses out there, making it hard to choose the best one. This guide is designed to show you the basics, not to provide a comprehensive overview of the best rewards credit cards. As always, it’s important to do your own research and consider exactly how credit cards -- and all of the potential perks and benefits -- fit into your personal financial plans.
Read more: Best Travel Credit Cards
1. Beware of ‘budget creep’
Rewards cards work by granting “points” for shopping in certain categories, like travel, dining or groceries.
When it comes to earning rewards, there are two main categories:
- Cash back: You’ll earn a certain percentage back based on where you shop, like restaurants, grocery stores, warehouse clubs and gas stations.
- Travel: These cards typically give you points or miles based on how much you spend, which you can redeem for flights, hotel rooms and other destination-related activities. Typical rewards spending categories include travel and dining.
While these are categories most people spend on anyhow, getting a credit card can sometimes obscure your budget, since you can spend however much you want and deal with the bill later. Call it “budget creep.” The deferred cost model makes it much easier to exceed what you had planned to spend. And if you spend 50% more on say, dining out, than you typically would, and your travel rewards credit card rewards you with 4x miles (worth about 1 cent each), you’re losing money.
Studies have shown that when paying with a credit card, consumers tend to spend substantially more than when paying with cash, according to the MIT Sloan School of Management.
To help offset the tendency to spend more with a credit card -- which has to do with “the pain of paying” -- it’s helpful to chart your spending over the past three to six months and break out expenditures into categories. After signing up for a credit card, compare your spending across the same time period with the period before having the credit card. If you notice discrepancies, especially large ones, consider using cash for those purchases or simply take note of how you used to spend and match it up.
2. Understand the difference in rewards
Even among standard rewards, there is a large variety to choose from. The first thing you should do is learn about your potential earnings. For instance, if you get 3% cash back at restaurants, you’ll earn $3 for every $100 you spend. And that’s only at restaurants; you might get 2% at gas stations and grocery stores, then 1% everywhere else, for example. These types of rewards credit cards literally put cash back in your pocket.
For instance, the Blue Cash Preferred® Card from American Express* earns 6% cash back at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%) and 6% cash back on select U.S. streaming subscriptions (terms apply). Cash back is received in the form of Reward Dollars that can be redeemed as a statement credit. The Chase Freedom Flex℠* earns 5% cash back on rotating quarterly categories when you activate (on up to $1,500 in combined quarterly purchases, then 1%).
If you choose a travel card, you can earn points or miles towards travel. Some cards limit your use to specific airlines or hotels, while others don’t have any restrictions. How much you earn on travel cards from spending varies, but redemption is usually $0.01 per point or mile. Depending on the card and offers, you might be able to earn more. Also, see if there’s flexibility in your redemptions. For instance, can you transfer your points for a statement credit, cash back or gift cards?
When you use the Bank of America® Travel Rewards credit card*, you’ll earn 1.5 points for every $1 you spend, no matter where you spend your money. You can redeem your points for a statement credit to go towards flights, hotels, rental cars and other travel-related expenses. The Chase Sapphire Preferred® Card will redeem cash, gift cards and travel purchases.
Read more: Best Cash-Back Credit Cards
3. Watch out for games that make you spend more
Most rewards credit cards are set up to feel like a game. You unlock bonuses and earn points through spending, which can later be redeemed for “rewards.” This system inverts the natural emotions of shopping -- typically you have a visceral sense of loss or sacrifice when you trade in your hard-earned cash for another object, which helps regulate your buying tendencies.
But with rewards credit cards, you get a positive emotional kick when you see your credit card points increase, you unlock a bonus or qualify for a perk. Take welcome bonuses, for example. You only get the bonus if you are able to spend a certain amount during the initial three months of card ownership.
Usually, the threshold is set such that you have to spend more than you typically may, luring you into bad habits. One exception to this rule is if you’ve budgeted for a large purchase, and you’re able to time it to take advantage of a new card bonus, like signing up for an airline credit card and then booking your annual trip. But even in that case, you aren’t altering your trusty budget.
The gamification of your finances can tempt you to play along, instead of treating it as an important discipline. It’s better to ignore the gamified terms and seek offers that will generate the largest return for your current spending habits, instead of causing you to alter them in service of an issuer’s offer.
4. Check the fees
Credit card companies often charge you fees for the luxury of using the card. Look out for fees like:
- Annual fees: This is a fee for using the card. Some cards don’t charge annual fees. The ones that do charge one can range greatly in cost.
- Late fees: If you don’t make a minimum payment on time every month, you could face a late payment charge.
- Interest fees: These are what you face if you don’t pay your balance off every month. If you tend to charge more than you can afford or don’t think you’ll be able to pay your balance in full, you’ll be responsible for the statement balance as well as the added interest costs.
- Cash advance fee: If you take out cash against your credit card balance, you could pay a cash advance fee for convenience, like 3% to 5% of your advance. You might also get hit with a higher interest rate on your cash advance compared with your card’s interest rate on purchases.
- Balance transfer fee: If you’re moving a credit card balance over to another card, some issuers will charge you a balance transfer fee.
- Foreign transaction fee: Some issuers charge for using your card overseas. Find out what the foreign transaction fee is before using it for overseas travel.
5. Review welcome offers and how to redeem
While $3 back on $100 spent doesn’t sound like much, an introductory offer might be more enticing. Think $200 on the first $1,000 you spend in the first three months of opening an account. Some credit cards offer bonus earnings for a specific amount of time. For example, you might earn 6% back at restaurants for the first three months of your account opening, then 3% after that.
For travel cards, it could be 50,000 bonus points when you spend $3,000 on purchases within the first three months. Some companies that charge an annual fee might waive it for the first year.
How you redeem your rewards is important too. For instance, you could redeem:
- In cash: Deposit your cash-back rewards straight into your bank account as cash.
- As a statement credit: Use your rewards to lower your monthly credit card payment.
- On purchases: Like airlines, airport lounges, hotels, room upgrades, and more.
- As gift cards: Convert your earnings into a gift card for you or someone else.
6. Don’t go overboard
Earning and redeeming points can take time. While some rewards credit cards are easy to use, others require awards charts, transfers and complicated redemption processes to maximize the value of points or miles. Some credit card review sites even explain how to make the most of credit card rewards by signing up for five to 10 different cards (or more).
These strategies fail to take into account the amount of time and emotional investment required on your end. If you’re paying seven different credit card bills twice a month and spending hours comparing reward flights and points systems, you need to factor in that effort when calculating the cards’ overall value. How much is your time worth? And how much emotional energy are you expending to keep track of all the offers and bonus categories?
Before choosing a credit card, don’t forget to determine how much time and energy you’re willing to invest in the process. It’s usually a matter of a few hundred dollars a year -- a significant amount of money, but not enough to sacrifice your peace of mind.
Which type of rewards card should you get?
There are many different reward credit cards to choose from, but they can be broken into three main categories: Travel cards, cash-back or rewards cards and co-branded credit cards. Which type is best for you will come down to what you’re looking to get out of the card.
Travel credit cards
A travel credit card can be a great tool to help cut back on the cost of traveling. Most cards’ main benefit is earning points or miles that can be redeemed to cover a travel expense, whether it’s for airfare, hotel stays or the myriad other expenses that come with traveling.
Some cards can even help expedite your airport experience with TSA PreCheck or Global Entry credits or priority boarding, or help reduce the stress of travel with airport lounge access.
There are general travel credit cards that can be used with any hotel or airline or co-branded credit cards with specific hotel or airline brands. The latter often provide brand-specific perks like complimentary elite membership status or discounts on food and beverages.
Each type of travel credit card can work with your personal travel budget and lifestyle. Unfortunately, the best travel credit cards tend to charge an annual fee, but it could be offset by the card’s benefits, especially if you’re a frequent traveler. Remember, credit cards are tools -- you want it to work for you rather than the other way around.
Cash-back credit cards
Cash-back credit cards are one of the most common types of cards. They provide a return on most or all of your spending in the form of cash back, which can typically be redeemed for statement credits or deposited directly into your bank account. They’re great for earning a return on everyday expenses like gas and groceries. The best cash-back credit cards offer a strong rewards rate and a handful of useful benefits like shopping protections.
They generally come in three forms: flat-rate cash-back cards, tiered cash-back cards or rotating cash-back cards. Flat-rate cards like the Wells Fargo Active Cash® Card earn the same rewards rate on purchases no matter what you’re buying, tiered cash-back cards like the Capital One SavorOne Cash Rewards Credit Card* offer higher rewards for specific purchases, and rotating cash back credit cards like the Chase Freedom Flex offer rewards for categories that change each quarter, or about every three months.
Co-branded credit cards
Co-branded credit cards are partnered with a specific brand. These include retail or store credit cards, hotel credit cards and airline credit cards. They offer rewards and benefits specific to whichever brand they’re partnered with. Retail cards frequently have higher APRs and are sometimes limited to use at a single retailer, so co-branded travel cards are generally more useful.
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*All information about the Blue Cash Preferred Card from American Express, Chase Freedom Flex, the Bank of America Travel Rewards credit card and the Capital One SavorOne Cash Rewards Credit Card has been collected independently by CNET and has not been reviewed by the issuer.
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