If you’re looking into a new credit card, there are several advantages in having a “rewards card” that could earn credit card points or cash rewards while you shop. But which card is better suited to your goals, budget, and lifestyle? This article covers what credit card rewards are, how they work, and how to choose the best rewards credit cards for you.

What are credit card rewards?

Most people are familiar with how a traditional credit card works: use it to make purchases, then pay the bill. It’s simple. But there’s another card type many consumers might not know as well: rewards credit cards. These come in various flavors with different options and rewards. Some give rewards points for your purchases, and some earn cash rewards. Other cards, such as those for loyalty or membership programs, offer membership rewards points that are usable for a specific brand’s product, like purchases at certain grocery stores or restaurants.

Types of reward points and how to redeem them

Three main types of credit card rewards are out there: points, miles, and cash back. For most, every dollar spent earns you one point, one mile, or a percentage back in cash.

But before we dip in further, let’s talk about bonus categories, which may apply to any rewards card.

Bonuses

Sometimes, you get more rewards per purchase-dollar than usual. Your credit card issuer might offer a 2X bonus on gas purchases — say, 2 points per dollar spent on gas, but 1X on other everyday purchases. Bonus categories from 2X to 10X aren’t unusual, and some issuers have rotating bonus rewards: one week might be 5X on hotels and rental cars, the next week may be 5X on drugstore purchases. Another week might have 10X on any eligible delivery service (UberEats, DoorDash, etc.) from restaurants. Knowing when bonus categories give the highest rewards could help you work the program to your advantage.

If you have big grocery bills, look for a card that offers a good bonus on grocery purchases. If you’re a frequent driver, look for gas purchase bonuses. If you travel regularly, bonuses on hotel and car rentals might be beneficial. Sometimes a bonus applies only to eligible purchases made from one vendor, like Target. Knowing the details could help you leverage your spending habits to gain the highest rewards.

Points

Many credit card issuers give points for card purchases. Unless there’s a special bonus in effect, usually you’ll receive one point for each dollar spent. At a certain number of points (which varies by the card) you’re allowed to redeem points.

You might redeem points for a gift card at a one-to-one ratio, but if those points go to booking a trip, you might get a 2X redemption bonus. The value of points is somewhat undefined until they’re redeemed for products or a statement credit.

Points cards are generally a good all-around choice for many consumers. They do not push you to adjust your spending habits to enjoy the rewards.

Miles

Many travel-related cards reward miles instead of points. You might earn anywhere from 1 to 5 miles per dollar spent. The higher bonus tiers (3X-10X) usually apply to travel purchases with 1 or 2 miles per dollar rewarded for regular purchases. When you redeem rewards on a miles card, sometimes there are higher reward options when applied to travel. Points might redeem for twice their value (or more) when booking certain hotels, car rentals, or flights. However, they might redeem at one-for-one if you trade miles for gift cards or statement credits.

Frequent travelers likely benefit the most from a miles card, as the rewards are usually focused on travel purchases and redemptions. Travel/miles cards sometimes include other benefits, like waiving the foreign transaction fee for international purchases, providing lost luggage insurance, or paying for global entry program enrollment to help speed passage through border control.

Cash back

A cash rewards credit card, not surprisingly, rewards dollars based on a percentage of purchases. Many cash-back cards offer at least 1% back on all purchases. Some also have bonus tiers — like 1% for all purchases, but 3% for groceries. Some may have rotating bonuses: 5% back on entertainment purchases one month then 5% on rental cars booked the next month.

Reward dollars are generally redeemable for statement credits, a mailed check, or a direct deposit to a bank account. Other redemption specials might offer a $40 gift card for $20 in cash rewards, though these usually are for a specific vendor.

If you don’t travel much, a cash-back card might be a good choice, rather than a miles card, if you find one that fits your typical purchases.

Sign-up bonuses

Many rewards cards offer sign-up bonuses, but that could involve a higher annual fee. Sometimes bonuses are only awarded after a certain amount is purchased, or 3 to 6 months from account opening. But signing bonuses are sometimes substantial, like 80,000 points or miles, or 5 free nights at a hotel — which may offset or even overcome the annual fee.

Other factors

Some cards let you transfer points to other loyalty programs, like for airlines or for a specific hotel credit. If you’re a member of one of these loyalty programs, look for a card that fits.

Balance transfers might not earn rewards. And rewards usually apply just to new purchases, not existing purchases. So, it’s worth knowing when the specials start and stop.

How to choose the best rewards credit card for you

You may have noticed a type of card described above that could fit your spending habits. Research the options that match your lifestyle, then get yourself some good rewards — whether it’s for miles, points, or cash.

Learn more about credit cards and personal finance at Best Egg.

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