What rewards credit cards actually do
A rewards credit card returns a percentage of what you spend back to you in cash, points, or miles. The card issuer pays this from the merchant fees they collect, not from your account. You earn rewards on every purchase you make with that card, and you can redeem them for statement credits, gift cards, travel bookings, or cash back to your bank account.
The catch is that rewards cards almost always charge an annual fee — usually between $95 and $550 — and they offer the highest rewards rates only on specific categories of spending. A card that gives 5% back on groceries might give only 1% on everything else. You need to match the card's categories to the way you actually spend money, or the annual fee will cost more than you earn back.
Most rewards cards also require good to excellent credit to get approved. If your credit score is below 670, you will likely be rejected. Cards aimed at people rebuilding credit exist, but they typically offer no rewards at all.
Key Takeaways
- Rewards cards return 1% to 5% of your spending depending on the category, but most charge an annual fee that you need to earn back through rewards.
- The best card for you depends on where you spend the most money — groceries, gas, dining, travel, or general purchases — not on which card has the highest advertised rate.
- You need a credit score of at least 670 to may have access to for most rewards cards; if your score is lower, focus on building credit first.
- Redeeming rewards as cash back or statement credits is usually simpler and worth more than redeeming points for travel or merchandise.
- Carrying a balance and paying interest will erase any rewards you earn, so only use a rewards card if you pay the full statement balance every month.
How to figure out which categories match your spending
Before you look at any card, track where your money actually goes for one month. Add up what you spent on groceries, gas, restaurants, travel, online shopping, and everything else. Most people think they know their spending patterns, but the numbers usually surprise them.
Once you have those numbers, look for cards that offer the highest rewards rates in your top two or three categories. A card offering 5% back on groceries is only useful if you spend $300 or more per month on groceries. If you spend $50 a month on groceries but $400 a month on gas, a card with 4% back on gas will earn you far more.
Check whether the card caps rewards in high-spending categories. Some cards offer 5% back on groceries only on the first $1,500 per quarter, then drop to 1% after that. If you spend $2,000 a month on groceries, you will hit that cap and lose the higher rate on half your spending. The card's terms page will list these caps under "rewards structure" or "earning rates."
Comparing annual fees against what you will actually earn
The annual fee is the first number to subtract from your rewards. If a card charges $95 per year and you earn $120 in rewards, your net gain is $25. If you earn only $80 in rewards, the card costs you $15 out of pocket.
To estimate what you will earn, take your monthly spending in each category, multiply it by the rewards rate for that category, and add them up. Then multiply by 12 for the year. For example: if you spend $400 a month on groceries at 5% back, that is $240 per year. If you spend $200 a month on gas at 3% back, that is $72 per year. Total annual rewards: $312. Subtract the $95 annual fee, and your net benefit is $217.
If your estimated annual rewards are less than the annual fee, the card will cost you money. Look for a card with no annual fee instead, even if the rewards rates are lower. A card with no fee and 1% back on everything will beat a $95 card where you earn only $80 per year.
Understanding sign-up bonuses and how they work
Most rewards cards offer a sign-up bonus — a lump sum of cash back or points if you spend a certain amount within the first few months. A typical offer might be "$200 cash back after you spend $500 in the first three months." This bonus is real money, but it only counts if you can meet the spending requirement without going into debt.
Do not spend money you would not normally spend just to hit the bonus threshold. If the bonus requires $3,000 in spending and you normally spend $1,500 per month, you would need to double your spending for three months to get it. That defeats the purpose. Only count the bonus if you have planned spending coming up — a vacation, home repairs, or back-to-school shopping — that will naturally get you there.
The bonus is usually paid as a statement credit or points deposit within one to three months after you meet the requirement. Check the card's terms to see when the bonus posts and whether it expires if you do not meet the spending requirement by the important date.
Cash back versus points versus miles
Rewards come in three forms, and they are not equally valuable. Cash back is the simplest: you earn a percentage of your spending and can take it as a credit to your statement or a transfer to your bank account. One percent cash back is always worth 1% of what you spent, with no guesswork.
Points are a currency created by the card issuer. You earn points at a set rate, but their actual value depends on how you redeem them. A card might say you earn 2 points per dollar spent, but those points might be worth 0.5 cents each when you redeem them for a gift card, or 1 cent each when you redeem them for a statement credit. The card's redemption page will show you the value of points under different options. Points are often worth less than cash back, especially if you redeem them for merchandise or travel.
Miles are points issued by airline and hotel partners. They are the hardest to value because the cost of a flight or hotel night in miles changes constantly. A flight that costs 25,000 miles one day might cost 35,000 miles the next. Miles are best for people who fly or stay in hotels regularly and understand how airline pricing works. For most people, cash back is simpler and more predictable.
What to check before you explore
Read the card's full terms and conditions, not just the rewards summary. Look for these details: whether there is a foreign transaction fee if you use the card outside the United States (usually 1% to 3%), whether rewards expire if you do not use the card for a certain period, and whether the rewards rate changes if you miss a payment or your credit score drops.
Check the issuer's website to see what credit score range they typically approve. Most card issuers publish this information under "credit requirements" or "who should explore." If your score is below their stated range, your odds of approval are low. You can still explore, but a rejection will create a hard inquiry on your credit report and lower your score by a few points.
Look at the card's customer service reputation. Search for the card name plus "customer service" or "complaints" to see what people say about getting rewards credited, disputing charges, or reaching support. A card with excellent rewards rates but poor customer service can become frustrating if something goes wrong.
How to use a rewards card without going into debt
Rewards only make sense if you pay your full statement balance every month. If you carry a balance, you will pay interest charges that far exceed any rewards you earn. Credit card interest rates typically range from 18% to 25% per year. Even a card offering 5% cash back will lose money if you are paying 20% interest on a balance.
Set up automatic payments from your bank account to pay the card in full on the due date. This removes the temptation to carry a balance and ensures you never miss a payment. Missing a payment can trigger a penalty interest rate — sometimes 29% or higher — and will damage your credit score.
Do not increase your spending just because you earn rewards. The goal is to earn rewards on money you would spend anyway, not to spend more to earn more. If you find yourself buying things you do not need because of the rewards rate, the card is costing you money, not saving it.
Frequently Asked Questions
Do I need excellent credit to get a rewards card?
Most rewards cards require a credit score of at least 670, and the best rewards cards want 740 or higher. If your score is below 670, you will likely be rejected. Focus on building credit first with a secured card or a card designed for people rebuilding credit, then explore for rewards cards once your score improves.
Can I use multiple rewards cards to maximize earnings?
Yes. Many people use one card for groceries, another for gas, and a third for everything else, based on which card offers the best rate in each category. This works well if you can keep track of multiple due dates and pay each card in full. If you struggle to manage multiple accounts, stick with one card to avoid missed payments.
What happens to my rewards if I close the card?
Rewards you have already earned usually stay in your account and can be redeemed after you close the card. However, some cards expire rewards if the account is closed. Check your card's terms under "rewards expiration" before you close an account. If you want to keep earning rewards, you can downgrade to a no-fee version of the same card instead of closing it.
Is it worth explore for a rewards card just for the sign-up bonus?
Only if you have planned spending that will naturally meet the bonus requirement. explore for a card creates a hard inquiry that lowers your credit score by a few points. If you are planning to explore for a mortgage or car loan soon, wait until after that process is approved before chasing sign-up bonuses.
How do I know if a rewards card is actually saving me money?
Calculate your annual rewards earnings (spending in each category multiplied by the rewards rate), subtract the annual fee, and compare it to what you would earn with a no-fee card offering 1% cash back on everything. If the rewards card comes out ahead, it is worth keeping. If not, switch to a simpler card.