If the sheer number of card choices is making your head spin, you are probably not alone. Here is some help to pick the right rewards card in six steps:
- Compare credit card rewards programs.
- Calculate your rewards-earning potential.
- Factor in sign-up bonuses.
- Determine rewards program redemption value.
- Subtract annual fees.
- Learn about cardholder benefits.
1. Compare credit card rewards programs. Choosing a rewards credit card best suited to your needs starts with looking at your spending habits. If you drive more than you fly, for example, a card that offers savings at the pump will be more useful than a travel rewards credit card. On the other hand, a rewards credit card that earns cash back on everyday purchases is best if your spending is spread across categories such as grocery stores, restaurants and gas stations.
You can begin to narrow your search by matching rewards cards to your spending habits. Aim to select a card that makes earning rewards easy to do as you buy items you need or enjoy at places where you already shop.
You’ll want to make sure that you understand the different types of rewards – cash back, points and miles – and how you can redeem them. Some cards earn one point for every dollar you spend, and others earn points only when you spend, say, at gas stations or supermarkets. Look at your spending to see which cards could earn the most rewards or discounts for you.
Read the fine print of the rewards program before you apply for a card. Find out if you can cash in rewards in any amount or if you need to reach a certain threshold before you can redeem them.
Also, check whether limits apply to bonus rewards. Some cards may have annual or quarterly limits on the spending eligible for rewards in certain categories. You will want to know whether rewards expire and whether you’ll pay any fees to redeem them.
How does the card handle late payments? Often, you can’t earn or redeem rewards after a missed payment, and you will be charged a fee to restore your rewards, plus a late fee.
2. Calculate your rewards-earning potential. Looking at your spending habits can also help you estimate how much you can earn with a rewards credit card. Tally your overall spending, and identify the categories where you spend the most.
Next, choose either a card with rewards in bonus categories or flat-rate rewards. A card with bonus categories can boost your rewards earnings but requires you to track and activate the categories.
If you don’t want to worry about bonus categories, you could instead pick a flat-rate card that earns the same amount of rewards on every purchase. Look for a card that earns more than one point per dollar on every purchase.
You may decide to use more than one credit card strategically. When you’re buying groceries, for instance, you may choose the card that gives extra points in that category but the card with a good flat rate for other purchases.
An example of a card with bonus spending categories is the Bank of America Customized Cash Rewards credit card, which earns 3% cash back in a category of your choice and 2% back at grocery stores and wholesale clubs. Cardholders can earn bonus cash back on up to $2,500 in the 3% and 2% categories each quarter and then 1% back. All other purchases earn 1% cash back.
3. Factor in sign-up bonuses. Rewards cards frequently offer large bonuses to attract new users, but they usually have spending minimums to earn them. You’ll have to track how much you’ve spent using your credit card to know when you meet the requirement.
Just make sure you use regular expenses to hit the spending minimum and avoid credit card debt, which will be a much bigger challenge than chasing a sign-up bonus.
Some people practice churning, or repeatedly opening and closing credit cards to earn sign-up bonuses. With lots of sign-up bonuses available, churning can be attractive, but significant drawbacks come along with the practice. If you plan to churn credit cards, you risk overspending and possibly damaging your credit score after you close accounts; staying away from churning to protect your credit is best.
4. Determine rewards program redemption value. Redemption value is what your points or miles are worth in dollars, and values vary for different rewards programs.
Doing the math when you’re evaluating rewards programs is important. You may have a higher redemption rate for travel or merchandise, for example, than for cash back or gift cards.
Here are a few examples:
- Hilton Honors American Express Surpass Card points are typically worth about 42 cents each, which is a bit low compared with other co-branded hotel credit cards. But this card can still offer value if you use your points strategically.
- With Chase Sapphire Preferred Card, one point is equal to 1 cent in rewards. Cardholders can get 25% more value when redeeming points for travel booked through the Chase Ultimate Rewards portal.
Redemption options also differ by rewards program. Some programs offer statement credits, and others allow you to redeem your rewards directly toward purchases or into bank accounts.
Certain credit card rewards programs let you transfer points or miles to partner programs. If your card earns Chase Ultimate Rewards points, for example, you can transfer them 1-to-1 to several travel partners, including airlines and hotels. You can also transfer Ultimate Rewards points from one Chase card to a few others.
5. Subtract annual fees. Rewards cards with the best sign-up bonuses and most valuable perks usually have annual fees. Keep in mind that paying an annual fee doesn’t make sense if you don’t earn enough rewards in a year to offset it.
You’ll need to crunch the numbers. How much would you earn on a card with no annual fee and a lower rewards rate versus a card with an annual fee but better rewards?
If you can maximize other cardholder benefits, the annual fee may be worth it, even if you lose money. For some cardholders, intangible rewards, such as priority boarding, may be important.
6. Learn about cardholder benefits. These can be valuable. Purchase protection and extended warranty coverage, for example, can come in handy if you need to repair or replace an item you bought with your card.