Understand Credit Card Rewards Basics and Find the Best Card for You

How can credit card companies earn a profit while giving out rewards, and which rewards cards are the best? We’ve got the answers for you.

Are you overwhelmed by all the credit card options out there? You aren’t the only one. Credit card ads are everywhere, whether we’re at home watching TV, in line at the bank, shopping at the mall, or even on a flight across the country. 

But signing up for a credit card isn’t a decision that shouldn’t be made lightly. After all, you could face major negative consequences if you don’t follow the credit card company’s rules. On the other hand, you could be missing out on great perks and rewards by not signing up for a credit card that fits your budget and your lifestyle. 

So how do you know if a credit card is right for you, and which credit card (or even credit cards) are the best fit for you? To find out, start by learning about the three basic types of credit card rewards and then diving into the best cards for each reward type.

Buyer Beware: Before You Sign Up, Remember This

Before you sign up for any type of credit card, remember these two rules: pay attention to the details and always pay off your balance in full.

By “pay attention to the details,” we mean lookout for annual fees, sign-up fees, late payment fees, and any other fees that a credit card company might charge you. Also, if you’re thinking of signing up for a credit card just for the bonus, really pay attention to the details. To earn the sign-up bonuses, you may have to spend a certain amount first – and you won’t get that bonus if you don’t spend the required amount within a certain period of time. 

Remember, you’re dealing with a business here, not your friend. The credit card company is out to make money, so you need to learn their rules before you start spending.

How Credit Card Companies Can Afford to Give Rewards

Business man in background and balance with gold coins in foreground

Have you heard stories of people getting free vacations or expensive items from their credit card rewards? If so, you may be wondering, “Okay, so just how can credit card companies afford to hand out all these amazing rewards I’m hearing about?”

It’s a valid question with a complicated answer. Again, credit card companies are businesses that are, in a way, waiting for you to make a mistake: to miss a payment so they can charge you a late fee or to charge you interest on any outstanding balance. When you (or any consumer) make a mistake, the credit card company makes more money.

The other way credit card companies make money has to do with the businesses where you use your card. Any time you buy anything with a credit card, the person or company (called the vendor) that you purchase from has to pay a fee to the credit card company. It may be a small fee or a large one – but those cents add up over time. 

The credit card company wants you to choose to use your credit card to pay, instead of your debit card or cash, because that’s the only way they get the fee from the merchant. They would rather share their proceeds of the profit on the transaction (the fee the vendor pays them) with you through rewards than risk you not using a credit card at all.

There’s one final reason that credit card companies can afford to give rewards, and it’s in the fine print. Pay attention to the details of the rewards program because there may be limits. 

According to Investopedia, “Most cash rewards programs have an annual maximum limit, so while they may offer a generous 5% cash back reward, there may be an annual cap or maximum limit you can reach. Other cards only offer cash back for certain categories of purchases, such as at restaurants or gas stations.” 

Using Your Card Strategically

Are you community-minded? Do you believe in helping the people in your area? If so, use your credit card wisely.  Use your debit card when you shop at a small or local business. That way, you save the owner from having to pay the high transaction fees. But when you’re shopping at a big business, you might as well use your credit card and start earning rewards.

Choosing the Right Card

Young man choosing between two credit cards

Now that you know just how credit card companies can afford to give rewards, you may be more interested in signing up for a card. First, you should decide what type of card will have the maximum benefit for your life. Do you want to travel more? A card with miles rewards is probably the right choice for you. 

Would you rather have the ability to choose between travel rewards and cash? Then a card with points rewards could be your best option. Last but not least, a card that gives you cold, hard cashback may be the best choice if you want the ultimate flexibility.

Credit Cards with Miles Rewards

Do you dream of vacationing multiple times a year? Do you see yourself flying somewhere new every season? Is your mind constantly on the beach?

If there’s enough flexibility in your schedule and budget, then a credit card from an airline with miles rewards may be the best choice for you.

The Best Cards for Miles

Discover it card in foreground with grass in background

Keep in mind that you’ll need to research where the airline flies to. If you live in Hawaii and you want to travel frequently to New York, then don’t sign up for a credit card with an airline that doesn’t travel between the two!

The United Explorer Card, the Delta Skymiles Gold American Express Card, as well as the Southwest Rapid Rewards Plus Credit Card all come recommended by NerdWallet. You can also sign up for a card that isn’t tied to one specific airline, such as the Discover it Miles card, and the Capital One Venture Rewards card.

Read More: Best Credit Cards For Travel Points

Credit Cards with Cash Back Rewards

On the other hand, maybe you’re not interested in prioritizing travel for health reasons or because your schedule just won’t allow it. That’s totally understandable and the right decision for many people. If you’re one of them, then you may want to look into a card that gives you cashback.

The Best Cards for Cash Back

Black denim pocket filled with three American bills and a rewards credit card

According to WalletHub, “The best cash back credit cards give at least 1.5% cash back on purchases, along with $0 annual fees, initial bonus offers, or 0% APR promotions. Some of the best cash back credit cards offer the same cashback rate on all purchases, while others provide bonus cashback in certain purchase categories.”

WalletHub recommends the Blue Cash Preferred Card from American Express, the Chase Freedom Unlimited Card, and the Wells Fargo Active Cash Card. You can also sit down with your current bank and see if they offer any cashback rewards cards.

Before you sign on the dotted line, take a look at where you’re currently spending the most money. If the answer is groceries, for example, then you will want to choose a cashback credit card that rewards you the most points for spending on groceries. 

For example, if Card A gives you 2 points for every $1 you spend on groceries, but Card B gives you 3 points for every $1 you spend on groceries, then you should choose Card B to maximize the benefit to your wallet.

Read More: The Best Cash-Back Credit Cards of 2021

Credit Cards with Points Rewards

Last but not least, consider signing up for a credit card with points rewards. Points rewards are amazing (and my favorite type of reward) because they are so flexible. You can exchange them for credit with an airline or you can exchange them for cashback. The choice is yours!

If you have the type of lifestyle where you may want to travel a lot one year, but enjoy cashback rewards the next year, consider signing up for a credit card with points rewards instead of miles or cashback.

The Best Cards for Points

Person paying with a black credit card

Before you choose your card, it’s good to know that 1 point (or mile) from one card isn’t going to necessarily be worth the same as 1 point (or mile) from another card. That’s part of why it’s so difficult to compare credit cards. 

However, you can start by checking out the top cards that are recommended by the experts. If none of these cards are a good fit for you, keep looking. Check with your bank and see if they offer any type of reward credit card, too. 

Both Chase Ultimate Rewards and American Express Membership Rewards come highly recommended by Value Penguin. They also recommend Citibank ThankYou Rewards as another top-tier option for maximizing your rewards.

Always Pay Off Your Balance

When you sign up for a credit card, do not fall into the trap of charging more than you can actually afford. If you have to pay the credit card company late fees and interest, and you would have avoided those charges by simply using your debit card, then you are already losing the rewards game. 

However, if you know that you can always pay off your balance in full, then you can trust yourself with signing up for a credit card – and start enjoying the rewards!

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