Heard people talking about earning “free” flights, hotel stays, or cash back just by using a credit card? Welcome to the world of rewards credit cards! While they sound fantastic (and can be!), choosing your first one can feel overwhelming. What are points? Is cash back better? What’s an annual fee? And what on earth is APR?
Don’t worry. This guide will break down the basics to help you confidently choose your first rewards credit card and use it wisely.
What Exactly is a Rewards Credit Card?
At its core, a rewards credit card works like any other credit card: it allows you to make purchases on credit, which you then pay back later. The “rewards” part means the card issuer gives you something back for using their card – typically a small percentage of your spending. This reward comes in various forms, most commonly cash back or points/miles.
This differs from a basic credit card, which might offer a low interest rate but no rewards for spending, or a secured card, which requires a cash deposit and is primarily for building credit history.
The Big Question: Cash Back vs. Points/Miles?
This is often the first hurdle for beginners. Let’s break them down:
- Cash Back Rewards:
- What it is: The simplest form of reward. You earn a percentage of your spending back as cash. For example, a card might offer 1.5% cash back on all purchases. If you spend $1,000, you earn $15 back.
- How you get it: Usually as a statement credit (reducing your bill), direct deposit to your bank account, or sometimes a physical check.
- Pros: Easy to understand, highly flexible (cash is king!), straightforward redemption.
- Cons: The value is fixed (1 cent per point, essentially). You generally won’t get outsized value like you potentially can with travel points.
- Good for: Beginners who value simplicity, people who don’t travel often, anyone wanting straightforward rewards without much fuss.
- Points or Miles Rewards:
- What it is: Instead of cash, you earn points or miles for your spending. These points belong to a specific program – either the bank’s own program (like Chase Ultimate Rewards® or American Express Membership Rewards®) or a co-branded program with an airline (like Delta SkyMiles) or hotel chain (like Marriott Bonvoy).
- How you get it: Points accumulate in your account. You then redeem them for specific things, most commonly travel (flights, hotels), but often also for gift cards, merchandise, or even cash back (though usually at a lower value than travel).
- Pros: Potential for high value, especially when redeeming for travel (flights or hotel stays, particularly premium cabin flights or luxury hotels). Can offer exciting travel perks.
- Cons: More complex to understand and redeem effectively. Value can vary wildly depending on how you redeem. Often tied to specific airlines/hotels unless it’s a general travel points card.
- Good for: People who travel regularly (or aspire to), enjoy researching the best ways to use points, and are comfortable with a bit more complexity to potentially get more value.
Which Should You Choose First?
For a first rewards card, cash back is often the recommended starting point due to its simplicity. However, if you already have specific travel goals and are willing to learn the ropes, a beginner-friendly travel points card could also work. Consider your primary goal: straightforward savings or travel aspirations?
Key Factors to Consider When Choosing:
Beyond the type of reward, look at these crucial elements:
- Annual Fee:
- What it is: A fee charged once per year just for having the card open. Can range from $0 to $700+.
- Why it exists: Cards with annual fees typically offer higher rewards rates, more valuable perks (like airport lounge access, travel credits, free hotel nights), or bigger sign-up bonuses.
- For Beginners: Start with a card that has no annual fee or a low one (under $100). This lets you learn how rewards cards work without pressure to “earn back” a hefty fee through spending or perks you might not use yet.
- Earning Rates:
- What it is: How many points/miles or what percentage cash back you earn per dollar spent. Cards often have different rates for different categories.
- Example: A card might offer 3% cash back on dining, 2% on groceries, and 1% on everything else. Another might offer 2x miles on all purchases.
- Consider: Look at your own spending habits. If you spend a lot on groceries, a card rewarding grocery purchases makes sense. If your spending is varied, a card offering a good flat rate on everything might be better.
- Redemption Options & Value:
- What it is: How easily can you use your rewards, and what are they worth?
- Consider: For cash back, is there a minimum amount needed before you can redeem (e.g., $25)? For points, how easy is it to book travel or transfer points? What is the baseline value if you redeem for cash or gift cards?
- Welcome Bonus (Sign-Up Bonus):
- What it is: An introductory offer to entice new cardholders. Usually requires spending a certain amount of money within the first few months (e.g., “Earn $200 cash back after spending $500 in the first 3 months”).
- Consider: These can be valuable, but never overspend just to meet the requirement. Choose a card whose bonus requirement aligns with your normal spending.
- APR (Annual Percentage Rate):
- What it is: This is the interest rate charged if you carry a balance on your card from one month to the next. Rewards cards often have high APRs compared to basic, low-interest cards.
- How it works: If you don’t pay your statement balance in full by the due date, interest charges start accumulating on the unpaid amount. This interest can quickly wipe out any rewards you’ve earned.
- Grace Period: This is the time between the end of your billing cycle and the payment due date. If you pay your entire statement balance by the due date, you typically won’t be charged interest on purchases during that period.
- CRUCIAL ADVICE FOR BEGINNERS: Always plan to pay your statement balance IN FULL every single month. If you cannot do this consistently, a rewards credit card might not be the right tool for you right now, as the interest costs will likely outweigh the rewards. Think of it as a payment tool, not a borrowing tool.
- Types of APR: Note that cards often have different APRs for purchases, balance transfers (moving debt from another card), and cash advances (withdrawing cash – usually very expensive and not recommended). Focus on the Purchase APR.
- Other Perks: Some cards offer benefits like travel insurance, rental car insurance, purchase protection, or access to special events. These are nice extras but shouldn’t be the primary deciding factor for your first card unless a specific perk strongly aligns with your needs.
How to Choose Your First Card: A Simple Process
- Assess Your Spending: Where does most of your money go (groceries, dining, gas, general shopping)?
- Define Your Goal: Do you want simple cash back or are you aiming for travel?
- Start Simple: Look for no-annual-fee cards first. Compare 2-3 beginner-friendly options in your chosen category (e.g., flat-rate cash back cards, simple bonus category cards, or basic travel point cards).
- Check the Welcome Bonus: Is it achievable with your normal spending?
- Note the APR: Understand the interest rate, but commit to avoiding it by paying your balance in full.
Responsible Use is Key
Rewards are only rewarding if you use the card responsibly:
- Pay on Time: Late payments incur fees and hurt your credit score.
- Pay in Full: Avoid high interest charges by paying your statement balance every month.
- Don’t Overspend: Only buy what you would normally buy just to earn rewards.
Conclusion
Choosing your first rewards credit card doesn’t have to be daunting. By understanding the difference between cash back and points, considering factors like annual fees and earning rates, and crucially, committing to paying your balance in full to avoid high APR charges, you can select a card that adds real value. Start simple, learn the ropes, and enjoy the perks!
Disclaimer: This article provides general information and is not financial advice. Credit card offers, rates, and terms change frequently. Always review the specific terms and conditions of any card before applying.