If you’re going to use a credit card, shouldn’t you be paid to do so? Rewards cards help you enjoy your daily spending. Here’s what you need to know to get the best possible returns from rewards cards.
What is a rewards credit card?
Rewards cards pay you back every time you use them. Many of these cards refund you a percentage of each cash purchase. Others reimburse you in points or miles for a specific airline, hotel chain, or general travel expense.
Points and miles rewards are a bit more complicated than cash rewards. The value of a mile or point does not always equal an exact cash equivalent. Cards like Chase Sapphire Preferred offer Ultimate Rewards points, where each point is worth 25% more than its cash counterpart when redeemed for travel through the Chase Ultimate Rewards portal.
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Whether in the form of cash or points, these rewards may seem small, but they can add up quickly. Rewards accumulate in the account over time until you use them.
The three types of cashback cards
Fixed rate cards
Flat rate cards earn a fixed percentage on all transactions, usually 1% to 2%, depending on the card. They are perfect for people who like a wallet lean to a credit card with no hassle. The Wells Fargo Active Cash Card earns an unlimited 2% cash reward and a big $200 cash sign-up bonus after spending $1,000 on purchases within three months. As part of this no-frills spending strategy, load everything onto the card, including the less obvious items like automatic payments on home security or internet and phone bills.
Bonus category cards
Bonus category cards earn high cash back – usually 5% in specific categories such as gas, restaurants or grocery purchases for a given period. These bonus categories usually change every three months. A card may offer 5% cash back on Amazon and Target purchases from October to December. The cardholder must register to activate the bonus category online, in the app or by calling customer service.
All other general non-bonus purchases continue to earn 1% or 2% cash back without any activation, depending on the card. The Discover The “it” card may be perfect for people who enjoy the excitement of the different bonus categories each quarter. To maximize rewards, only use this card for bonus categories.
Tiered cards offer a hybrid between fixed rate cards and bonus category cards. They offer a few select high rewards categories of up to 3% to 4% cash back, and usually 1% on all other general purchases. The Blue Cash Everyday card from American Express offers benefits such as 3% in supermarkets, gas stations and on online retail purchases, each capped at $6,000 per calendar year. All other purchases earn 1%. Plus, it gives you a $200 credit on your card balance after spending $2,000 on purchases on your new card within the first six months of membership.
Rewards can be redeemed online, in the app, or by calling customer service. Cardholders can redeem what they’ve earned to pay off their balance, donate to charity, book a trip, receive gift cards, or just get a cash check.
How to Maximize Credit Card Rewards
To get the most out of your rewards, consider owning three credit cards: one from each category above.
Before the start of each term:
- Plan the use of your credit card.
- Search and register in the bonus category for the term.
- Write down the bonus categories on a sticky note and keep it in your wallet.
- Maximize your cash back by sticking to your spending plan.
Three-month spending plan
at several levels
3% in supermarkets
2% on everything else
Are rewards credit cards right for you?
Rewards credit cards are ideal for consumers who plan to pay their credit card bills in full each month. It’s not rewarding to pay more than 20% interest to receive 3% cash back. Also, spending more than you can afford to maximize signup bonuses and rewards is tempting but dangerous. Additionally, some of the best rewards cards may charge an annual fee. The idea is to save money by racking up credit card rewards, not to lose money by racking up credit card debt.
Whatever your spending style or financial goals, a solid strategy is the ultimate goal in these difficult times. If your needs match what they offer, rewards credit cards could help you achieve that goal.
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Foolish contributor Alka Mehta holds no financial positions in the companies mentioned. Discover Financial Services, American Express and Wells Fargo are advertising partners of The Ascent, a Motley Fool company. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a board member of The Motley Fool. The Motley Fool holds positions and recommends Amazon and Target. The Motley Fool recommends Discover Financial Services. The Motley Fool has a disclosure policy.