Rewards credit cards are a way for lenders to attract new customers, and consumers may benefit from all the new choices and varieties of rewards and perks that are on the market. Of course, to get the biggest benefits we have to look carefully at all the options. Let’s check out the many types of rewards cards and review all the things a smart shopper should consider when choosing one.

What does a rewards credit card do?

The typical rewards card gives cash back, points, or travel miles based on every dollar spent on eligible purchases. Many cards have a flat reward rate: for one dollar spent, you earn one point. Other cards have tiers, where purchases of a specific type may earn more points. For example, you might earn 2X points per dollar for gas purchases and 3X for hotels and rental cars.

Some cards have rotating bonus categories, perhaps offering 5X points one month for purchases at grocery stores. The next month, the 5X might apply to rental cars booked or drugstore purchases. Some cards offer all three levels. For example: 1X on all purchases and 2X on gas, plus monthly bonus rewards like 10X on travel or your monthly cellular telephone bill.

Pro tip: Don’t jump on the first rewards card you find! Do some research. Every card has its own rules and reward plans, so let your spending habits guide you to one that meets your needs. A credit card offering 10X on gas purchases earns little if you always take the subway. A 10X reward on food purchases through an eligible delivery service is fantastic — unless you love cooking all your meals yourself.

Some people try to collect the best rewards cards for all their purchases. One card for gas, one for travel, one for food. Perhaps even adding a card featuring a premier rewards program with a rotating super-bonus.

It’s even possible to pair cards to increase the effect. Convert your 10X airfare reward dollars on one card into a payment for a 5X hotel reward bought through another card. Or use a big rewards statement credit to make another purchase on the same card, but for a bonus 10X category. Clever, right?

How does a rewards credit card work?

Getting a rewards card is the same as any other credit card: simply fill out an application and submit it. Your credit score will drive the interest rate that you’ll be assigned. At the account opening, you may have to pay an annual fee, if there is one.

A valuable rewards bonus might be offered on any qualifying balance transfers made within 3 or 6 months from account opening. Sometimes, though, balance transfers are accompanied by a balance transfer fee — so make sure a “great deal” is great for you.

Another common perk is a signing bonus. Some cards offer something major, like 80,000 points or 100,000 miles, just for signing up. However, that bonus may be accompanied by a sizeable annual fee, so make sure you read the fine print.

Once you obtain the right card, using it is fairly simple. Make note of what regular and special bonus categories are in force, and use your rewards card every time you purchase one of those bonus-related products.

For example, let’s say you were going on vacation in Miami, and you’ll spend $2,000 for a week in a nice beachfront hotel. If your card offers 6% cash back rewards on hotels and you use that card to book your hotel, you’ll earn cash rewards. In this case, $120. Awesome — but then what?

When the time comes, how you redeem rewards depends on the card. Rewards on combined purchases are often distributed monthly at the end of your credit cycle. At that time, you usually have several options. For a cash-rewards credit card, statement credits are popular, so the rewards pay down your balance. Or you can have all the cash transferred by direct deposit into your bank or savings accounts.

With a points or miles rewards card, you may have several additional options, depending on the card’s terms. Similar to cash-back cards, you may be able to convert points or miles into a statement credit, often at 100 points to the dollar. For example, 50,000 points might get you a $50 credit.

Or you may be able to use the points or miles to pay for products or services, often at a discounted price. Examples of this type of reward points use are:

  • A hotel credit or airline tickets for your next trip.
  • Restaurant meals, or food deliveries.
  • Gift cards to use at your favorite stores.
  • Movie passes, show tickets, concert seats.

It pays to read and understand the stipulations and rules related to your card’s rewards. Let’s review some of the things we should look for.

On the purchasing side

Some rewards apply only if you go through the correct channel. For example, you might need to do these to reap any rewards:

  • Book travel through a designated website.
  • Fly on one specific airline.
  • Obtain food deliveries from one particular service. (Uber, but not Lyft.)
  • Shop at certain chains to earn rewards. (Jimmy Johns, but not Subway.)

Other things, such as foreign transaction fees, can hit you when traveling internationally. Even though you earn rewards on a trip, the fees might offset them.

When a bonus reward is offered, it likely won’t apply to any existing purchases, only new ones.

On the redemption side

The nuances of redeeming your rewards are less complex, but some could still be troublesome because they’re unexpected.

Sometimes, reward miles apply only to specific flights. For instance, domestic is allowed, but not international. Point redemption might be restricted to certain time frames. One common factor is how points or miles can’t be redeemed unless they reach a given level. If you stop using the card early, the rewards may never materialize.

Is it worth getting a rewards card?

Sure, reward cards can be great. But there may be risks if you get a card that’s not right for you.

  • Some cards with the highest rewards also have the highest annual fees. If you’re paying $300 a year for a card with awesome travel rewards, and you stop traveling for any reason, you may not recoup that big fee.
  • Consumers sometimes buy stuff they really don’t need just to get the reward points. They get caught up in earning rewards or justify spending because they want to recoup their annual fee.
  • If you don’t choose wisely, you could lose out on valuable rewards because you didn’t pick the best card for your lifestyle.
  • You also might miss rewards because you don’t have the time or interest to keep track of all the policies or specials.

There’s often a tradeoff between fees and rewards. Consider whether you’ll use the card enough, and in the right way, to recover any annual fee. (That is, unless you obtain a rewards card with no annual fee!)

Take the next step

The right rewards credit card is the one that fits your own specific needs. Remember to consider the pros and cons before committing to any card.

Best Egg has a great online resource center for learning about credit cards and all things financial. Check it out if you want to learn more.