Before you decide on a rewards credit card, you have to decide on what kind of rewards card to get, as there are three primary categories to choose from: cash back, points, or miles. To help you choose, here’s a look at each category and so you can choose the best option based on your spending habits.
How rewards cards work
We are at the point where almost all credit cards offer some kind of incentive or reward for use, usually in the form of cash back, travel miles, or as points that can be redeemed on an online shopping portal run by the credit card company.
Many cards also offer an introductory bonus rewards that, at least lately, can be worth up to $1,500 in redeemable value—provided you spend up to a certain amount with the card, usually within the first few months of opening your account. These welcome bonuses are the basis for much of “rewards chasing” behavior you see from credit card aficionados. Some cards also might also offer 0% interest in the first year of the card as an enticement.
Cash back rewards
Cash back credit cards will pay you back a percentage of your purchases either as a statement credit or with a check or bank deposit. There are two types of cash back cards: flat-rate and tiered. Flat rate cards typically give you 1-2% back on all purchases made on the card. Tiered cash back cards, on the other hand, limit their juiciest rewards to spending in a handful of categories, from online shopping, to travel, to dining, with different percentages for each, usually in the 2-3% range, with at least one category being closer to 5% cash back.
If you’re a “set it and forget it” type who doesn’t do a lot of travel or dining out, then a flat rate card is probably your best bet. The only problem with tiered rewards is that you have to actively manage your spending if you’re looking to max out your rewards, which is why people often have dedicated cards for travel or online shopping. Personally, I’ve forgotten to update an older card’s bonus category and missed out on easy rewards simply because I wasn’t paying attention. But if you’re dedicated, you can squeeze more value out of a tiered card, as the cash back percentages tend to be higher.
There are two main types of cards that offer rewards in miles: airline co-branded cards and, less commonly, general travel cards that aren’t tied to a specific airline. When you use these cards to spend on specific categories like travel, you will accumulate air miles (the average air mile works out to 1.3 cents in spending, according to Value Penguin) rather than points or a cash back percentage. These miles can then be redeemed for an airline ticket, although many cards will allow you to redeem miles for cash back credits or other merchandise as well.
Airline-specific cards are more limited than general travel cards in how you can earn and redeem points, but they’re less likely to have annual fees, some of which are closer to $500 on the premium travel cards (which offer other perks, too, like free checked bags, seat upgrades, priority boarding, or lounge access).
To state the obvious, these cards are ideally suited for heavy travelers, especially if you’re already doing a lot of flying for work. If you don’t have any intention of frequent travel, you might want to stick to points or cash back.
Point-based cards are bridge between the cash back model and general travel cards, and they can offer the most flexibility for redemption, whether that means travel tickets, cash credits, gift cards, or merchandise purchased through an online shopping portal. Like tiered cash back cards, points-based cards will often offer bonus points based on various shopping categories like gas or travel.
As a rule, it’s a good idea to strive for a 1:1 value, meaning that one point is worth a penny. Since many merchant partners can offer deep discounts on some of their items, you’ll like this type of card if you enjoy the thrill of finding a good deal online. Otherwise, if you don’t care for the hassle of managing your points, a cash back card might be your best option.