Is a Rewards Credit Card Right for Me?

If you've had credit card debt in the past or know friends and family members who have gotten into trouble with it, the idea of opening a rewards credit card may seem like a trap. It doesn't have to be that way, though. If you're armed with a little knowledge and a smart strategy, a rewards credit card can bring your savings goal within reach. Answer the following questions to find out whether this type of credit card is right for you.

Am I a responsible credit card user?

The best — and easiest — way to answer this question is with another question: Do you have a spending problem? Or, have you gotten into credit card debt in the past? If your honest answer to either one of these questions is "yes," a rewards credit card may not be right for you. As with all credit cards, you must use them wisely; for some, they can bring more financial harm than good. No rewards credit card, however attractive, is worth going into debt over. It's also not a good financial vehicle for gaining rewards related to a single event, such as saving airline miles for a destination wedding for someone who doesn't normally travel.

If you are confident that you will charge only what you can afford, will pay your bill off in full each month, and will always make your payments on time, then the only question to answer is which rewards card meets your goals.

Will my credit standing benefit from it?

Think of your finances like a toolbox; credit cards are a vital tool, as long as you use them correctly. It's important to make any credit card, including rewards cards, work for you and to avoid the trap of spending money you don't have just to earn rewards you want.

As you practice responsible credit card usage, you'll build an attractive credit history and should boost your credit score, which will qualify you for better rates from not only banks that back credit cards, but also from lenders considering you for car loans and mortgages.

Visit FTC.gov Opens in new window to see how you can get a free copy of your credit report.

Are the rewards useful to me?

Rewards cards work by paying you an incentive on your credit card purchases. Every purchase racks up rewards that you can redeem for cash, miles, points, gift cards, and more. Some rewards cards offer extra benefits for specific types of purchases. For example, an airline credit card might offer you more points when you purchase flights on their airline with their credit card than what you'd earn buying groceries at the store.

Other rewards cards offer more points on gas or groceries, or have a rotating list of weighted point categories that change quarterly.

Finding the best card for you depends on what you want to do with the rewards. There are generally three types:

• Cash — Rewards earned are either paid in cash or credited to your card account; some can be redeemed for gift cards.
• Points — Points are given on each dollar charged; $1 = 1 point; sometimes, double or triple points are offered for a limited time period. Points can be redeemed for items in the card's shopping portal, which is stocked with merchandise from retail partners, or for hotel stays and rental cars.
• Miles — Dollars spent are rewarded with miles that can be redeemed for plane tickets.

If you want to open a rewards card to try to earn free plane tickets or hotel stays for a vacation you're planning, a travel rewards card may be the right fit for you. If you want to earn points that you can redeem for merchandise or transfer to travel partners, a points card may be the best route. If you just want to earn cash back on your normal spending from time to time, consider a cash rewards card.

Am I prepared to do the work to maximize benefits?

A few basic tips can help ensure that you get the most from your rewards credit card:

• Take advantage of sign-on bonuses to earn more points or miles.
• Meet initial spend requirements by moving your current spending to that card.
• Get creative with expenses you're paying with your checking account or cash that you can move to your rewards credit card. School tuition, babysitter payments, and donations, as well as home renovations and office equipment are all possibilities.
• Evaluate whether or not you will be able to meet initial spending requirements for sign-on bonuses before you sign up for the card.

Some rewards cards are better than others. Some charge higher annual fees or have steeper requirements to meet before rewards kick in. Don't forget to check the terms carefully before signing up for any credit card.

Will I be diligent in reading contracts?

It's critical to know the terms of the specific rewards card you are thinking about getting. Read every word carefully so that you understand what you will earn on which types of purchases; what fees are associated with the card; when points expire, and how you can lose points. For example, some rewards cards will cause you to forfeit all points if you make late payments.
Other fine print snafus to be aware of include:

• Changing rewards categories — Some cards change what you can earn the most number of points for each month or quarter. Make sure you're paying attention so that you can earn the most points possible, and don't assume that categories will stay the same from month to month.
• Qualifying establishments — Before you start charging, make sure the retailer or service provider you're purchasing from actually qualifies with your rewards card.
• Redeeming rewards — Know exactly how to redeem your points and what's going to be involved before you rack up a bunch of rewards. Some cards require you to opt in or sign up to redeem points in certain categories, and not all rewards are automatic.
• Changing terms — Terms and conditions can and do change at any time. Don't assume the terms of how you earn rewards with your card are static. Pay attention to every notice you receive from your card and read it carefully.

Being informed is the best thing you can do for your credit and your credit cards. If you have a good credit score, use your credit wisely and get a rewards card that fits your goals. It can be a great way to enjoy free perks just for being a responsible credit card holder.

John Schmoll writes about investing, budgeting, and frugal living. He is a father, husband, and veteran of the financial services industry who's passionate about helping people find freedom through frugality.

For Compliance Use Only:1005333-00001-00