Are rewards credit cards worth it?

Rewards cards are popular for a reason — you can get cash or travel points on purchases you’d make anyway. When used responsibly, a  rewards credit card can help you save money on flights, hotels, dining out, concert tickets and more.

But not everyone knows how to maximize their credit card rewards. What type of rewards card would best suit your needs? How do you earn a sign-up bonus? What are the best ways to redeem your rewards?

In most cases, rewards cards are worth it — as long as you’re not carrying a balance and the annual fee is less than the value of the rewards you earn each year. I spoke with Rick Conyers, Assistant Vice President of Credit Card Products at Navy Federal Credit Union, about some considerations for rewards cards.

Advantages of rewards cards

The value of a rewards card depends on whether you use the card responsibly — and that includes taking advantage of all the rewards you earn. Here are a few factors that make rewards cards worth it:

• Rewards on everyday purchases: Naturally, the biggest benefit of using a rewards card comes from the rewards you earn. The best travel rewards cards earn points or miles on every purchase, while the best cash back cards earn cash back on everyday spending.
• Welcome bonus: Rewards cards that offer a sign-up bonus, also called a welcome bonus, let you earn rewards after becoming a new cardholder and spending a certain amount in a set timeframe.
• Travel redemption options: If you jet-set often, a travel rewards card lets you put points or miles toward flights and hotels. They can also come with perks like elite status, travel insurance and statement credits.
• Cash back redemption options: People who love to spend on going out or simply use their card to pay for everyday expenses might benefit from cash back rewards. Flat-rate cash back cards earn the same amount on every purchase, while bonus category cash back cards earn more points in certain purchase categories. Whether you want a flat-rate card versus a bonus category card will depend on your spending habits.

Conyers says your lifestyle plays a big role in choosing a rewards card. “I encourage everyone to look at where they typically spend and make sure what they’re choosing aligns with their lifestyle,” he says.

His family of five doesn’t travel often, but they like to go on family outings. That’s why Conyers uses his cash back card for their regular spending. This summer, he and his kids are using cash back to go to the movies.

“We splurge and use cash back to cover things we don’t do as frequently throughout the year,” he explains.

Disadvantages of rewards cards

Rewards cards, like any credit cards, also come with potential risks worth thinking about before you apply, such as:

• Overspending to earn rewards: It can be tempting to spend more than you can afford to max out your rewards or earn a welcome bonus. In fact, 2 in 3 Americans (67 percent) are chasing credit card rewards while in debt.
• Untapped value: If you don’t actually redeem your rewards, you’re leaving money on the table. And some redemption options are less valuable than others, so it can take effort to maximize a rewards card’s value.
• High interest rates: Credit card interest rates are at an all-time high, and rewards cards tend to also carry high rates. If you don’t pay off your balance in full each month, the interest you accrue may outweigh the value of your rewards. “Consider the cost of holding debt on a rewards card,” Conyer advises.
• High annual fee: Many rewards cards charge an annual fee. When considering a card with a high annual fee, ask yourself if you can use the rewards and benefits that come with it. If not, “that annual fee will lose some of its luster,” Conyers says.
• High credit score requirements: Rewards cards may also require you to have good or excellent credit. Keep in mind that card issuers pull a hard inquiry on your credit when you apply for a new card, which dings your credit score. So, it’s good to know whether you’re likely to qualify before applying — especially if you plan to apply for other loans, like a mortgage or car loan, in the near future.

“There are always a few signs you want to look for so you don’t have buyer’s remorse when it comes to a rewards card,” Conyers says. “I encourage someone to think of the long-term plan they have for the card they’re looking at.”

Should you get a rewards credit card?

With so many rewards programs out there, it can be overwhelming to consider whether a rewards credit card is right for you and which type you should apply for. Here’s when a rewards card might or might not be worth it:

When getting a rewards card is worth it

If you don’t already have a good rewards card in your wallet, you may be leaving money on the table — especially if you travel frequently, buy a lot of groceries, pump gas often or make retail purchases that can earn you points.

For example, applying for one of the best credit cards for groceries could earn you cash back on eligible supermarket purchases. Using one of the best credit cards for dining out means you could earn cash back on restaurants and takeout. And if you’re planning a vacation in the near future, you should consider a travel rewards card.

When getting a rewards card isn’t worth it

If your credit score is less than good or you have a limited credit history, it might be difficult to qualify for a rewards card. Instead, you’d likely be better off focusing on responsibly using a starter credit card to build up your credit.

And if you’re already in credit card debt, it’s not a good idea to take on more debt in order to earn rewards. Prioritize paying down your current card balances first, because the interest you’re accruing likely outweighs the value of any rewards.

Rewards credit card alternatives

While many people want to earn rewards with their credit card, it’s worth noting that there are other types of cards available. The following cards might be a better fit than a rewards credit card, depending on your creditworthiness and financial situation:

Credit cards for those with bad credit or no credit

People with poor credit or no credit can apply for one of the best cards for bad credit. While these cards don’t usually come with many rewards or benefits, they may be easier to qualify for. After building credit with responsible use, you can upgrade to a card with more perks.

Balance transfer credit cards

If you have existing credit card debt, you might be better off with a balance transfer card. The 0 percent introductory APR period can buy you time to pay off the balance and avoid interest charges.

The Citi® Diamond Preferred® Card* is one of the best balance transfer cards on the market — and will save you more money than a cash back card, if you have credit card debt. This card doesn’t earn rewards, but it does offer a 0 percent intro APR for 12 months on purchases and 21 months on balance transfers. After that, the variable APR will be 18.24 percent to 28.99 percent, based on your creditworthiness. Balance transfers must be completed within four months of account opening to qualify for the promotional rate.

Debit cards

If you prefer to stay away from credit, a debit card is the modern version of cash. Debit cards are linked to your checking account. They’re usually free to use and make it difficult to overspend. It’s rare for a debit card to earn rewards, but there are a few options out there, such as the Discover Cashback Debit. If you apply and are approved for a free Cashback Debit checking account, you could use your debit card to get 1 percent cash back on up to $3,000 per month.

The bottom line

Though rewards credit cards have their pros and cons, applying for a card with rewards will generally reap more benefits than a card without rewards — as long as you use it responsibly. But if you aren’t maximizing your rewards, you’re missing out on money toward travel bookings, retail purchases and more.

If you’re on the hunt for the right rewards credit card, Bankrate’s CardMatch tool can help you find cards that fit your credit history, spending habits and financial goals.

*Information about the Citi® Diamond Preferred® Card has been collected independently by Bankrate. The card details have not been approved or reviewed by the issuer.