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Understanding Rewards Credit Cards: A Comprehensive Guide

At O1ne Mortgage, we prioritize consumer education in finance and credit. This article aims to provide an objective view to help you make the best decisions regarding rewards credit cards. For any mortgage service needs, feel free to call us at 213-732-3074.

What Is a Rewards Credit Card?

A rewards credit card offers you rewards when you use the card for purchases. These cards work similarly to non-rewards credit cards, where your transactions are added together at the end of each billing cycle. You can pay off the statement balance in full to avoid accruing interest or pay less than the full amount and revolve part of your balance, which will start to accrue interest.

Types of Credit Card Rewards

Rewards credit cards can be categorized in different ways. There are three basic types of rewards that you can earn from using your card: cash back, points, and miles. Additionally, there are four common ways that card issuers structure a card’s rewards rates.

Cash Back

A cash back credit card lets you accrue cash back rewards from your purchases. You might be able to redeem your cash back rewards for a statement credit to offset credit card purchases, a check, or a direct deposit into a bank account.

Points

Many card issuers use points as the currency for their rewards program. Some card issuers even have cash back credit cards that give you points worth 1 cent each. Depending on the card and program, you might be able to redeem your points for different types of rewards, such as travel, cash back, gift cards, or merchandise.

Miles

Rewards miles are the same as points, but airline credit cards and a few card issuers’ rewards programs use “miles” as their rewards program’s currency. With airline rewards cards, your miles get added to your airline loyalty program, and you can redeem them based on that program’s rules.

Common Rewards Structures

Many rewards cards structure their rewards program in one of four ways:

• Flat-rate rewards: You earn the same amount of rewards on all your purchases.
• Tiered rewards: You earn bonus rewards when you make purchases from certain merchants or within specific categories, such as dining or travel.
• Rotating bonus rewards: Earn a high bonus rewards rate on specific categories that the card issuer changes throughout the year.
• Dynamic bonus rewards: Earn bonus rewards on purchases in specific categories that you can choose and change throughout the year.

Advantages of Credit Card Rewards

Although the specifics will depend on the type of rewards card you use, most rewards credit cards offer several benefits:

• Rewards on Everyday Purchases: Earning rewards on purchases you were going to make anyway is one of the main benefits that rewards credit cards offer.
• Intro Bonuses and Interest Rate Offers: Many rewards cards offer an intro bonus to new cardholders who meet certain requirements.
• Purchase-Related Benefits: Many rewards cards also offer additional purchase protections and benefits.
• Additional Cardholder Benefits: You might get a lot of value from the other benefits that a rewards card offers.

Disadvantages of Credit Card Rewards

Consider the cons before you apply for a new rewards credit card:

• High Interest Rates: Rewards cards may have a higher APR than non-rewards cards.
• Overspending: It can be easier to justify a purchase if you’re earning rewards, and overspending can lead to revolving a balance and paying interest.
• Credit Requirements: The top rewards cards tend to require good to excellent credit scores.
• Devaluations or Lost Rewards: Points and miles rewards programs can experience unexpected devaluation.

Do Rewards Cards Build Credit?

Rewards credit cards can affect your credit scores the same as other types of credit cards. Paying your monthly bill on time and only using a small portion of your available credit can help you build credit. Missing payments and having a high credit utilization rate can hurt your credit scores.

Should You Get a Rewards Credit Card?

Although rewards cards aren’t a good fit for everyone, you could consider getting a rewards credit card if:

• You’ll use the card for everyday purchases that you were going to make anyway.
• You can generally afford to pay off your credit card bill in full each month.
• You only get a rewards card with an annual fee if the benefits outweigh the cost.
• You learn to understand how the program works, what transactions earn rewards, when rewards might expire, and the best redemption options.

What to Look for in a Rewards Credit Card

Card issuers often offer multiple types of rewards credit cards with different fees and rewards structures. If it seems like a rewards card is a good fit, the real question may be which rewards card to get. You can compare the options to see which might work best based on where you’ll use the card, how much you’ll spend, what types of rewards you want, and how much time you want to spend researching the rewards program.

Additionally, rewards cards with the highest rewards and most benefits usually have an annual fee. Consider whether a higher rewards rate or extra cardholder benefits are worth the cost, or if you’d prefer a rewards card with no annual fee instead.

Monitor Your Credit and Compare Card Offers

Narrowing down the list of potential credit cards to find the best options can be tough, especially if you’re not sure which cards you’ll likely get based on your credit score. You can check your credit report and FICO® Score for free from Experian and get matched with rewards card offers based on your credit profile.

For any mortgage service needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to help you navigate your financial journey with confidence.

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