Types Of Rewards Credit Cards

Many different types of credit cards are available, including rewards credit cards. These cards come in various forms and offer multiple types of rewards for the eligible spending you do on the card. These cards target specific types of expenses, such as everyday spending or travel costs, which may enable you to earn bonus rewards based on your most frequent purchases.

To choose the right rewards credit card for you, you’ll need to evaluate the rewards program for each card you’re considering. You’ll also need to analyze your spending habits and the overall structure of the card. If the card you choose doesn’t match your spending habits or lifestyle, you’ll risk missing out on opportunities to earn rewards and get maximum value.

What are credit card rewards?

Not all rewards credit cards work the same way, and the type of card you choose will depend on your spending habits and lifestyle. Credit card rewards come in three varieties:

From there, you can earn a flat rewards rate on all purchases or a higher rewards rate on purchases made in select categories. For example, bonus categories may include travel, dining or groceries.

Typically, cards that offer higher rewards rates in select categories come with fixed or rotating categories, the latter of which may change on a monthly or quarterly basis. Rotating categories are also more likely to be subject to monthly, quarterly or annual spending limits — after which you’ll earn a lower rewards rate on those purchases. However, some rewards credit cards with fixed categories offer spending limits, too.

How to choose a credit card rewards program

If you’re building a credit card rewards strategy to maximize how much you can earn on purchases large and small, consider the different types of credit card rewards and decide what will be more valuable for you: cash back, points, or miles?

Cash back: Best for simplicity seekers

Cash back is a straightforward way to get rewarded for using your credit card. You’ll earn a percentage of cash back on each eligible purchase you make with the card. Some cash back cards offer a flat rate on all purchases (for example, 2 percent cash back on all purchases). In this case, making a $100 purchase with a 2 percent cash back card would put $2 into your rewards balance.

Other cash back cards offer higher cash back rates for particular types of purchases (bonus categories) and a lower rate on general purchases. For example, a card might offer 3 percent cash back on grocery purchases, 3 percent cash back on gas purchases and 1 percent cash back on all other purchases.

Some cash back cards also offer higher rates of cash back in categories that rotate each month or quarter. These cards usually have a spending cap and require category activation to earn the higher rate.

The most common redemption options for cash back cards include:

• Statement credits
• Checks or direct deposits to a bank account
• Checks
• Gift cards
• Select merchandise
• Charitable donations

Before redeeming, check with your issuer to ensure you know the rules for cash back redemption and that you’re getting the best value (typically from getting statement credits or direct deposits).

Top picks for cash back cards

Points: Best for rewards maximizers

Many of the best credit card rewards programs offer rewards in the form of points. With credit card points systems, you’re earning points instead of dollars. The value of your points often depends on what you redeem them for. There are usually more ways to redeem points than with a simple cash back card, although every issuer offers different rewards rates, conversion rates and redemption options. For example, some Chase Ultimate Rewards redemption options include travel, cash back, statement credits, gift cards and select merchandise.

In general, credit card points can typically be redeemed for:

• Merchandise
• Cash back
• Gift cards
• Travel purchases
• Concerts
• Sporting events

Top picks for earning credit card points

Miles: Best for frequent flyers

Miles-earning credit cards are typically co-branded airline credit cards that allow you to redeem rewards for flights, seat upgrades and other travel-related expenses. These cards earn miles for every dollar you spend and often offer boosted rewards rates for travel-related purchases.

Credit card miles work in a similar way to points. As with points cards, you’ll typically earn a fixed amount of miles for every dollar you spend — although the rate could be higher in some purchase categories. The miles you earn accumulate in your loyalty account for the connected airline rather than with the credit card.

Booking a flight with miles is usually relatively easy. Simply sign into your airline account while booking the flight and choose to pay with miles.

Top picks for miles-earning cards

Cash back vs. points vs. miles – what’s right for me?

The answer to this question is never one size fits all. Maybe you’re a big jetsetter, so travel rewards in the form of points or miles makes the most sense for you. Or maybe you’re a homebody who’d rather rack up cash back. Or perhaps the best strategy for you may be to combine cards in your wallet so that you can earn both cash back and travel rewards. As Bankrate senior editor Brooklyn Lowery puts it, the answer to “which credit card rewards program is best for me?” is deeply personal:

It’s also important that you don’t get too bogged down in terminology. Often, what the rewards are called isn’t the most important feature. Much like Capital One calling its rewards “miles” even though they function like points, some airline credit cards refer to the rewards as points instead of miles.

For example, the Southwest Rapid Rewards® Plus Credit Card lets you earn points on your purchases. But you can still redeem those points for Southwest flights, just like you would with a card that earns miles. So, as you consider which type of credit card rewards you want to pursue, you may want to focus more on how to redeem the rewards rather than what they’re called.

The bottom line

The credit card rewards landscape is vast and can be overwhelming for those who are just starting out. By understanding the different types of rewards credit cards available, you can decide what rewards are most important to you. What matters most is maximizing your rewards earnings by using the right credit card for each purchase.

Frequently asked questions about types of credit card rewards

• Do all rewards credit cards work the same way?
  

  No, rewards credit cards vary in how they earn and redeem rewards. Cash back cards offer a percentage of your spending as cash or statement credits, while points and miles cards provide rewards that can be redeemed for travel, merchandise or other perks.

  Each card has its own rewards structure, earning rates and redemption options, so it’s important to choose one that aligns with your lifestyle and financial goals.

• Do I get credit card rewards for paying bills?
  

  Most credit cards reward eligible purchases, such as groceries, dining or travel, but some bills (like rent or utilities) may not qualify for rewards. Always check your card’s terms to see which purchases earn rewards. Some cards may exclude certain transactions, like balance transfers or cash advances, from earning rewards.

• Are credit card rewards tax-free?
  

  In most cases, yes. Credit card rewards earned through eligible purchases are considered rebates by the IRS and are not taxable.However, rewards earned without a spending requirement — such as certain welcome bonuses, referral bonuses or airline miles awarded simply for opening an account — may be taxable.

  If the value of these rewards is $600 or more, the issuer may send you a 1099-MISC form, and you’ll need to report it as income on your tax return. Always review the terms of your rewards program and consult a tax professional if you’re unsure.