Rewards credit cards 101

Types of rewards credit cards

There are different types of rewards credit cards that offer rewards in various forms. Here are some common types:

Points

Points-based rewards credit cards earn points per dollar spent, which can then be used to redeem merchandise, statement credits, gift cards, and other types of purchases which may depend on the card issuer, its affiliations, and other program details.

Cashback

With cashback rewards credit cards, cardholders may earn a percentage of cashback on purchases, which they can then redeem as statement credit, a deposit to a bank account, a check, or other types of credit which may depend on the card issuer and other program terms and conditions.

The PayPal Cashback Mastercard^®, for example, lets cardholders earn unlimited 3% cashback on all PayPal purchases.¹

Miles

Miles-based rewards credit cards let cardholders earn and redeem miles for travel-related expenses, such as flights, hotels, rental cars, or vacation packages.

How rewards credit cards work

People use rewards credit cards for different reasons and in different ways. Individuals should consider their personal financial situation and ensure that purchases fit comfortably in their budget.

While each card is unique, below are some ways rewards credit cards may work:

• Earning rewards: Some credit cards may offer more points, cashback, or miles for purchases in specific categories (such as gas, restaurants, hotels, or groceries), while others offer a flat rate for all purchases.
• Reaching the redemption threshold: Many rewards credit cards require the cardholder to earn a certain amount of rewards before they become redeemable. Some may also have a cap on the amount of rewards a cardholder can earn.
• Expiring rewards: Sometimes, a cardholder may be required to make at least one qualifying activity or redeem their rewards within a set period to ensure rewards don’t expire.

Choosing a rewards credit card

If someone is considering applying for or using a rewards credit card, they may want to keep some potential factors in mind:

• Credit score and credit history. These can determine which credit cards a person may be eligible for and may impact approval from a card provider.
• Travel frequency. A miles-based or co-branded rewards credit card may be suitable for people who travel often or frequent a specific airline or hotel brand.
• Top purchase categories. Some credit cards offer higher rewards for certain categories, such as groceries, gas, or restaurants.

Fees, interest, and other potential costs

As with most credit cards, rewards credit cards may come with potential additional costs. Examples may include:

• Annual fees. Some rewards cards may come with an annual fee. This will vary depending on the credit card and the card issuer.
• Interest. Evaluate the interest terms carefully — high interest rates may potentially outweigh the value of rewards if a balance is not paid in full.
• Foreign transaction fees. There may be foreign transaction fees when using a rewards credit card abroad. Fees will vary depending on the credit card and card issuers.
• Welcome bonus offers. Many rewards credit cards offer welcome bonuses. These bonuses often require the cardholder to unlock them by meeting a certain spending minimum within the first few months. It’s important to only spend within one's means even if there is a bonus offer. Overspending and not paying a full balance or missing a payment can potentially bring interest charges and other fees.

How to redeem rewards

Credit card issuers often have rewards portals that may make it possible for cardholders to view, manage, and redeem points, cashback, or miles all in the one place. However, each rewards credit card will have its own specific way of redeeming rewards, so it’s important for people to review account information to find the proper way to go about rewards redemption.

How to manage reward redemptions with multiple cards

Juggling reward redemptions with multiple cards can be challenging. Here are some potential ways cardholders could manage rewards:

• Keep track of expiration dates: Make a list of rewards credit cards’ rules and dates to avoid missing out on redeeming rewards before they expire.

• Use a rewards management tool: Various apps and websites can help track rewards balances, expiration dates, and redemption options in one place.

• Consolidate rewards: Some platforms and providers offer ways to combine rewards into one account. For example, PayPal makes it easy to earn, manage, and spend rewards across different credit cards — by linking eligible credit cards to a PayPal account, people can pay with rewards at checkout.

Potential risks when using rewards credit cards

While rewards credit cards can potentially offer benefits on purchases, they still come with the typical risks of credit cards. Some potential negatives of rewards credit cards could be:

• Possible overspending if trying to reach rewards goals
• Minimum spending requirements
• Complex reward structures
• Annual fees
• High interest rates