Rewards credit card

A credit card that gives cash back, points or miles on purchases, sometimes in exchange for an annual fee or higher APR.

What it means

Rewards cards return a portion of what you spend, either as a flat rate on everything or bonus rates in categories like groceries, dining or travel. Rewards may be paid as cash back, statement credits, points or airline and hotel miles, and many cards offer a sign-up bonus for reaching a spending target.

Rewards are funded partly by fees merchants pay and partly by interest and fees from cardholders. They pay off mainly for people who pay in full each month, because the interest on a carried balance usually outweighs the rewards. Cards with higher rewards often charge an annual fee, so the value depends on how much and where you spend.

Example

Suppose someone spends $1,500 a month on a card that pays 1.5% cash back, earning $270 a year. If they carried that $1,500 at a 24% APR instead of paying it off, interest would be about $30 a month, more than the $22.50 in monthly rewards.

How it’s used

Earning value on spending that is paid off monthly
Collecting travel points for trips
Using a sign-up bonus for a planned large purchase

Strengths and weaknesses

Strengths

Returns value on everyday spending
Sign-up bonuses and travel perks
Same protections as other credit cards

Weaknesses

Interest on carried balances quickly erases rewards
Annual fees and complex rules
Can encourage extra spending to chase rewards

Good to know

Compare the rewards you would realistically earn against any annual fee.

Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.