How to Choose a Rewards Credit Card

How to Choose a Rewards Credit Card: Rewards cards can be great tools to earn cash back, points, miles or other perks on your spending. With so many options, choosing the right rewards credit card for your needs is critical to maximizing the value you get.

This post will walk you through the factors to consider when applying, different types of rewards programs, how to earn and redeem rewards and more.

You can learn strategies to choose the best rewards credit card for your lifestyle and spending habits.

Evaluate If a Rewards Credit Card Is Right for You

Before applying for a rewards credit card, please review whether it aligns with your financial situation. Here are some key factors to weigh:

#1. Your Credit Score

Most rewards cards require good or excellent credit, with scores around 690 or higher. Check your credit score before applying to qualify for the top rewards card offers. Those new to credit or working to build scores may need to start with a secured card first.

#2. Your Spending Habits

Consider how much you typically spend in categories like grocery, dining, travel, etc. Cards that earn the most rewards align with your top spending categories. Track your expenses to identify where you spend the most.

#3. Paying Off Balances

To maximize rewards value, you’ll need to pay your balance in full every month. The high APRs on rewards cards mean carrying a balance can negate the rewards you earn. Make sure you never miss payments and avoid interest by paying on time and in full.

Different Types of Rewards Programs

With an overview of your finances and expenses, you can start comparing some of the main types of rewards credit cards. Consider which of these programs would be most worthwhile for your lifestyle.

Cash Back Rewards

Cash back cards provide statement credits or deposit rewards into your bank account. These flexible rewards work well for any type of spending. Consider flat-rate cash back cards or those with rotating bonus categories.

Travel Rewards

Cards that earn flexible travel points you can redeem for flights, hotels, vacation rentals or more are great for frequent travelers. General travel rewards cards provide the most flexibility while co-branded airline and hotel cards earn rewards to redeem specifically with that brand.

Points and Miles

For loyal customers of a particular airline or hotel, co-branded cards earn points and miles to redeem for award travel or other perks with that company. You’ll get the most value from your specific brand’s points system.

Retail Rewards

Store-specific cards offer bonus rewards for loyal shoppers like extra discounts or coupons. These niche cards work best for regular customers of that retailer.

Key Factors to Compare Rewards Card Offers

With an idea of which rewards structure sounds most appealing, here are some key details to compare among different card offers that provide that type of program:

Rewards Rates

The rewards earning rate is shown as “points per dollar spent” with higher rates earning rewards faster. Compare rates across spending categories too, not just the overall rate.

Annual Fees

An annual fee buys access to premium rewards and perks. Make sure the fee is justified by the value you’ll get from the card. Cards with no annual fee are also available.

Introductory Bonuses

A one-time welcome offer bonus in points/miles provides a significant boost if you can meet the minimum spend requirement within the designated timeframe after approval.

Foreign Transaction Fees

If you travel internationally, a card with no foreign transaction fees saves on currency conversion rates. This perk is common among travel rewards cards.

Tips to Hep You Maximize Rewards with Your Redemptions

To get the best value from your accumulated rewards, be strategic with redemptions. Here are tips for different types of programs:

Cash Back: Direct Deposits or Statement Credits

The simplest approach. Either let rewards accumulate for annual statement credits or set up direct deposit to your bank for regular rewards deposits.

Flexible Travel Programs: Transfer Partners

Transfer points/miles to airline and hotel loyalty partners to book award travel. This method sometimes gets you more value per point than booking through the card’s travel portal.

Hotel Points and Airline Miles Programs

Check award charts to find the lowest redemption rates for flights and hotel stays. Use points for expensive high-end redemptions to maximize the value per point.

Retail Programs: Stack Rewards and Look for Promotions

Layer percent-off coupons on top of loyalty member sales and discounts. Wait for special redemption sales or bonus offers to squeeze more savings out of your points.

Are My Credit Card Rewards Taxable?

Credit card rewards are considered a discount on a purchase rather than income, so they’re not taxable.

Dedicated users of rewards credit cards can easily rack up hundreds or even thousands of dollars a year in cash back, points or miles. Are those rewards taxable? Usually, no.

Discounts, Not Income

The IRS views credit card rewards as a discount rather than as income. So if you’re getting 2% cash back on a $100 purchase, that would be considered a $2 discount. Discounts aren’t taxable, so you don’t need to keep track of your credit card rewards for tax time.

The key factor is that credit card rewards must relate directly back to a purchase you made. As long as points, miles or cash back come from your spending on the card, the rewards are just discounts on those purchases.

When Rewards Become Taxable

In some cases, credit card rewards can cross over into taxable territory:

You sell or trade your points/miles for cash or gift cards not tied to the credit card rewards program.
You receive a sign-up bonus for opening a new credit card that’s not directly connected to a purchase you make.
You refer friends and receive rewards not tied to your own spending.

In those situations where the rewards don’t relate directly back to a purchase you made, the IRS may consider the rewards as taxable income you’d need to report.

Conclusion on How to Choose a Rewards Credit Card

The key to choosing a great rewards credit card is matching the card benefits to your lifestyle and spending habits. Compare factors like rewards rates, fees, flexibility and redemption options to select the right card for your needs.

Apply for a rewards credit card that makes earning and redeeming rewards with your daily expenses simple and rewarding.

Note that for most credit card users who earn and redeem points, miles or cash back through their cards’ loyalty programs, rewards are not considered income, so no need to worry about paying taxes on them. Just make sure your redemptions tie directly back to your spending to maintain that tax-free discount status.

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