If you love to travel, you can easily put thousands of dollars in vacation expenses on your credit card every year. But the right rewards credit card can earn perks that reduce the sting of those bills.
Some rewards cards put a little cash back in your pocket whenever you spend. Others offer the opportunity to rack up travel rewards with each charge you make on the card.
Zeroing in on your spending habits and lifestyle preferences can help you choose the right rewards card.
[Read: Best Rewards Credit Cards.]
How Rewards Credit Cards Work
Rewards credit cards provide benefits that make spending your hard-earned cash a little more pleasant. Each time you use one of these cards, you get something in return.
For example, a cash back credit card might return a certain percentage of your spending — often 1% to 5% — as dollars to redeem for statement credits, checks or direct deposits. On the other hand, a travel rewards card might earn airline miles or points that can be redeemed for flights, hotel stays, rental cars and various types of vacation expenses.
But paying down or paying off the balance on your card every month is crucial to get the most from a rewards credit card. That’s because rewards credit cards tend to have higher interest rates than other cards, says Kassi M. Fetters, certified financial planner and founder of Artica Financial Services in Anchorage, Alaska.
“If you carry a balance on your credit card from month to month, the interest rate becomes a critical factor,” Fetters says.
Choosing the Right Type of Rewards Credit Card
Knowing your spending habits is key to choosing the right type of rewards credit card, says Martha Cruz Zuniga, clinical ordinary professor and chair of the department of economics at The Catholic University of America in Washington, D.C.
“The main mistake is picking a rewards card based on the potential benefit — rewards — without comparing the actual cost: the interest rate it charges,” Cruz says.
For users who carry a balance, interest rates can take a heavy toll, with some cards charging annual percentage rates as high as 30%, she says.
“In most cases and when carrying a credit card balance, that cost would tend to exceed the potential rewards from a card,” Cruz says.
For this reason, she says folks who tend to carry a balance are better off finding a credit card that has “the most lenient fees and lower rates” rather than the biggest and best rewards. On the other hand, if you are confident that you will pay off the balance each month, a credit card that offers more rewards can be a good choice, even if the interest rate is higher.
Pros and Cons of Cash Back Credit Cards
Weighing the pros and cons of cash back credit cards can help you decide whether you want to apply for one.
If you want to keep things simple, a cash back rewards card might be a better bet than a travel rewards credit card, Cruz says. “A cash back rewards card tends to be more straightforward than travel rewards,” she says.
Other advantages to consider of cash back cards compared with travel cards:
— Low annual fee. If you pay an annual fee to use a card, it could be worthwhile based on the cash back you earn.
— Introductory APR. Cash back credit cards often come with an introductory 0% APR that can help you pay down a big purchase or debt without interest.
— Sign-up bonus. Many cards have a sign-up bonus, but you have to meet a spending requirement within a certain period to earn one.
A cash back credit card can boost your bottom line if you use it strategically, says Jennifer Bush, certified financial planner with Mainstreet Financial Planning in Los Gatos, California. Bush says she uses a couple of cash back credit cards in her everyday life.
“One of my cards gives great cash back on restaurants, gas and travel, so I use that one exclusively for those categories and nothing else,” she says. “I use a second one for all other spending for 1.5% flat cash back.”
However, cash back cards might not be the best fit for everyone. Disadvantages of these cards to keep in mind:
— High APRs. The ongoing rate you pay after any introductory APR can be high depending on your creditworthiness.
— Other benefits. These cards focus on cash back, which means that another type of card would be better if you were looking for travel benefits.
— Limited redemption options. Cash back is the primary option for most cash back credit cards.
Generally, cash back rewards are worth less than travel rewards, Fetters says. “The percentage of cash back is typically lower than the value of points or miles earned through travel rewards programs,” she says.
[Read: Best Cash Back Credit Cards.]
Pros and Cons of Travel Rewards Credit Cards
You’ll want to review the general pros and cons of travel rewards cards when you’re trying to choose between this type of card and a cash back card.
Typically, a travel card can be a better option than a cash back card if you take frequent trips, says James Shagawat, certified financial planner and partner advisor at AdvicePeriod in Paramus, New Jersey.
“Travel-focused cards have higher point values in their rewards ecosystems,” Shagawat says. That often makes them more valuable for travel than cash back on your purchases, he adds.
You may be able to transfer points from your card to hotel and airline loyalty programs, and perks might be available as soon as you open your account, Fetters says.
Other pros:
— Rewards value. You can earn points and miles at higher rates on travel spending than other rewards cards.
— Travel benefits. If you travel a lot, you may appreciate perks such as airport lounge access, travel insurance, free checked baggage — even travel credits. Some cards come with premium benefits, including VIP access to events and hotel room upgrades.
— Welcome bonuses. “Travel rewards cards often come with generous sign-up bonuses,” Fetters says. “You can earn a significant number of points or miles after meeting specific spending requirements.”
Some of the cons of travel rewards cards include:
— Annual fees. They tend to be higher than the fees for cash back credit cards. “While some cards waive the fee for the first year, it’s important to consider whether the benefits outweigh the cost in the long run,” Fetters says.
— Extensive rules. Redeeming points can be complicated with some travel credit cards.
— Limited redemption options. Some cards only earn rewards with specific travel brands. A general travel rewards credit card may offer more value if you don’t want to be tied down to a particular airline or hotel chain.
— Credit requirements. You may need very good or excellent credit for certain travel credit cards.
If you want a straightforward choice, a travel rewards card might not be for you, says Patrick Payne, associate professor of practice, personal and family financial planning at the University of Arizona. “They are less flexible to use and are often much more complex,” he says.
The cards may come with blackout dates and other restrictions. The complexity of the cards, Payne says, can make it difficult to figure out the true value of rewards.
Finding the Best Rewards Credit Cards
If you are looking for a great rewards credit card, do not focus exclusively on the rewards, Payne says.
Tread carefully before choosing a rewards card with a high annual fee, for example. Otherwise, cardholders might end up paying “more in the fee than they earn in higher rewards,” Payne says.
Choose a card that is the right match for your spending patterns, he adds.
“Don’t adjust your budget to fit the card — fit the card to your budget,” he says. “Paying more for things you don’t really value just to get points only leads to greater inefficiencies in your finances, which is the opposite of your goal.”
If you’re shopping for a card, use online tools to compare cards, Cruz says. Look beyond the rewards to other aspects of cardholder experience.
“Look at online customer reviews to have a sense of the type of customer service, responsiveness to problems and solutions offered by a specific credit card,” she says. “That should give you a sense of what to expect.”
[Read: Best Travel Rewards Credit Cards.]
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Cash Back vs. Travel Rewards: Which Is Better for You? originally appeared on usnews.com
Update 08/19/24: This story was previously published at an earlier date and has been updated with new information.
