Getting the Most from Credit Card Rewards

Credit cards are a ubiquitous facet of everyday life in the U.S., so much that most of us are surprised if we come across a store that does not accept them. The popularity of these little pieces of plastic is certainly driven by their convenience first and foremost, but with so many different card issuers competing for your business, many choose a card based solely on the rewards it offers. Credit card rewards programs come in many shapes and sizes, making it tempting to collect them as if they were trading cards. Since this isn't generally advisable, keep in mind the basics of rewards programs and how to pick the card that makes the most sense for your financial needs, especially as we approach the holiday season and begin spending and traveling even more.

Credit card reward basics

There are now many different categories of credit cards with rewards or other terms designed to appeal to a certain type of user. However, most cards still fall into two broad types based on their rewards program: travel points and cash-back.

In general, cash-back cards offer the following benefits:

• Usually has no annual fee, or has one that is quickly offset once you spend enough.
• Typically reimburses rewards as a flat percentage rate of your spending each billing cycle.
• Often offers a higher cash-back rate for certain categories of purchases. These categories may change periodically or stay the same.
• Rewards can be redeemed in several ways, either as credit applied to your next bill, a check sent in the mail or another form of reimbursement.

On the other hand, travel or points-based rewards programs usually work like this:

• Every purchase earns points at a set rate. For example, each dollar spent might equate to four points.
• Points can be redeemed for certain products or services, like a discount on airfare.
• Some cards might accumulate points faster for certain categories, or equate to a bigger discount on specific purchases.
• Travel/points cards tend to require an annual fee, but it is usually canceled out after a certain level of spending.

Cash-back in-depth

Some card users prefer cash-back programs because they are relatively straightforward: earn a small discount on everything, plus a little extra if there's a promotional offer or bonus category. It's also much easier to compare cash-back cards against each other, since they often advertise the rewards rates and help users estimate how much they can earn based on what they spend each month. For example, if you spend around $1,000 per month on your credit card earning at least 1 percent back, you can expect to save $10 every month. That amount only increases if you take advantage of the card's higher reimbursement rates on certain spending categories, if applicable. According to an analysis from Wirecutter , a person spending $1,100 per month could expect anywhere from around $200 to more than $300 in cash-back per year with the 10 most popular cards. That's about a 2 percent return - not a bad way to pad your savings account or come up with a little extra spending money for holiday presents.

Travel rewards close-up

Travel rewards cards can reimburse users at a similar or even higher rate than cash-back cards, but with more caveats and restrictions. Of course, the points these cards accrue are only really worthwhile if you can use them to buy things you would've purchased anyway. That's why in a separate analysis of travel cards, Wirecutter recommended taking a close look  at your spending and every card's rewards details to see if a certain travel card would actually pay off.

The card picked by the Wirecutter for people who spend a lot and travel often offers three rewards points per dollar of spending, but carries a $450 annual fee. That's much higher than usual, meaning you would need to be spending at least $280 per month on airfare or restaurants to recoup the cost of the annual fee through rewards. To reach the 2 percent return that most cash-back cards offer, you would need to spend around $2,050 per month.

Wirecutter did recommend another travel rewards card for a different kind of user. This one charged just a $59 annual fee, and offered three points per dollar spent on travel-related categories. That means someone spending around $1,000 per month could expect 1.5 percent of that back in rewards after fees. While that's not quite as good as many cash-back cards, certain users might simply prefer to earn travel rewards, or are seeking the many other perks that different credit cards offer.

As Wirecutter's analysis shows, it definitely pays to crunch the numbers before choosing a new credit card, but beyond that, it's a matter of personal preference. It's also worth mentioning that these 1.5 to 2 percent returns assume a user is paying off their full statement balance on time, not accruing additional expenses through interest charges and other fees. With interest rates on credit cards rarely lower than 10 percent, even a few days of carrying a balance past the due date could wipe out any savings benefit from rewards points.

As you continue to research and use credit cards, keep an eye on the offers out there, but never make a quick decision without doing your homework and finding the best rewards program for your lifestyle.