Have you heard the story about people who use credit cards to make money? It’s no fable. If you get the right type of rewards card and use it wisely, you will not just turn a profit, but enjoy all kinds of fabulous perks that are attached to the account.
It’s time to get to know what a rewards credit card is, and why you’ll probably want to work your way toward getting one.
What is a rewards credit card?
All credit cards allow you to pay for things with the line of credit set by the issuer, but those that do only that are considered basic vanilla cards. Rewards credit cards, on the other hand, also come with valuable programs. They come in three basic varieties:
- Cash-back. These accounts allow people to earn money from each purchase they make with the card. It’s a rebate program. For example, the card may offer 2% back on certain purchases and 1% back on everything else. Heavy use can result in decent pocket change. For example, charge a thousand dollars worth of stuff in categories that offer 2% back, and $20 will be returned to you.
- Point-based. Instead of cash, these accounts let cardholders rack up points as they make purchases. The points can be traded in for all kinds of things, such as products on the issuer’s online shopping portal, discounted gift cards, travel expenses and sometimes for cash. Points are usually worth 1 cent, but if you use them for travel their value can be greater.
- Travel. Similar to points cards, these accounts allow cardholders to accumulate miles as they pay for things with the card. Some travel credit cards are affiliated with a specific airline or hotel chain while others are more generic. In either case, you can redeem the miles for free airfare, upgrades and hotel rooms. Earning 60,000 miles can be worth $750 in travel costs.
Many rewards cards offer a one-time sign-up bonus, too. Depending on the card type, it may be a large pot of cash, points, or miles. To get them, you’ll have to charge a certain amount of purchases within a fixed period of time. It’s called the minimum spend. For a sign-up bonus of 30,000 points, the minimum spend might be $3,000. As long as you charge that much in the first three months of opening the account, points will be yours.
In addition to all the cash, points, or miles you can accrue, rewards cards have other perks embedded in them. It might offer:
- free checked bags at the airport and lounge entry
- extra insurance products and consumer protection
- discounted rates on car sharing companies
- access to private events and admission to museums
- priority shipping for online purchases
Focus on the rewards and perks that most interest you
So what appeals to you most? Will it be a cash-back card so you can enjoy straight up money, a point-based card so you can trade them in for a wide variety of things. or a travel card that will help you zip around for less while also getting the most? Read over many, and pay special attention to the rewards and extras that come with the card type of your choice. At least one will probably spark your interest.
Then scan the terms of the account, which include the annual fee and the interest rate (APR).
The more elite cards can have annual fees costing hundreds of dollars (usually waived in the first year), but you will come out ahead if you make the most of the benefits. APRs can be high as well, but if you pay the balance to zero every month it will be a non-issue. Still there may be a time when you want to spread the price of a purchase out over a few months, so you’ll want that rate to be as low as possible to avoid excessive financing fees.
Credit requirements for rewards cards
Before applying for the rewards card that looks fantastic, check your credit scores.
The most reward and perk-rich cards typically expect an applicant to possess good-to-excellent credit scores. To qualify, your FICO or VantageScores (which range from 300 to 850) might need to be at least six 670, but higher is definitely preferable. Income is also a factor. If you don’t make enough money to support the credit line on the card, you’ll probably be denied, so don’t bother if you’re unemployed.
Redeem your rewards the right way
When you do get a rewards card, develop a strategy to use what you’ve earned.
First is the sign-up bonus. Because they can be worth so much, consider what you’ll do with the initial windfall. If it’s cash, a few hundred bucks might be enough for a special dinner with your partner, or be put to better use as a statement credit, which reduces the size of your bill. If it’s points, maybe you want to buy holiday presents or gift cards from the issuer’s shopping portal. A slew of miles might be perfect for a weekend getaway.
After that, plan ahead for the rewards you’ll be amassing with use. If you want to earn $200 in cash or 40,000 points or miles for a specific purpose, you will be more apt to meet your goal.
Whichever card you get, just be sure you pay the balance in full and on time. If you don’t, interest and penalties will be tacked on, which will erode the value of your rewards. A fact about these accounts: the benefits will never outweigh the cost of hanging onto debt or being hit with a late fee.
San Francisco-based consumer finance journalist whose work appears in a wide variety of top-tier outlets.
Erica’s the resident money and credit authority for KRON-4 News and author of “Expecting Money: The Essential Financial Plan for New and Growing Families.” Erica is an amateur hockey player and ballet dancer and has the broken bones to prove it.