The credit card rewards game can be both intriguing and intimidating for those just getting started. There’s the allure of miles and cash back – but then there’s apprehension about damaged credit and debt.
“Rewards cards can get you in a lot of trouble if you’re not careful, but they also can provide great value to people who are responsible with their credit,” says Lance Cothern, founder of personal finance site Money Manifesto.
Read on for our beginner’s guide – and some starter card recommendations.
Beginners’ biggest worries
Brad Barrett, who coaches rewards newbies via his site Richmond Savers, has noticed two common fears among those just entering the rewards world:
I’ll ruin my credit: Yes, when you apply for a card, the inquiry will ding your credit, but the damage is minimal – and temporary. While it’s wise to be judicious about card applications (especially if you’re in the market for major loan), opening a card won’t necessarily “crater your credit,” Barrett says.
“People get freaked out because they don’t have the information,” Barrett says. “But I think once they understand the actual real-world impact, they’re usually put at ease.”
Cothern also notes that opening a new card will increase your overall credit limit, which could decrease your credit utilization (the ratio of outstanding balances to available credit) — and lift your score.
I’ll never be able to use my rewards: The rules of the rewards game can seem complicated to beginners.
“People hear the term ‘blackout dates,’ and there’s this fear that they’re going to get all these points, and they’re just going to sit there,” Barrett says.
That’s why Barrett encourages the easy wins of the rewards card world – cards that give a uniform number of points (or percentage back) per purchase and allow you to redeem via statement credits. Generic travel cards, such as the Barclaycard Arrival Plus and the Capital One Venture, are both examples.
“I like people to get quick wins and know that it’s all real,” Barrett says. “Then they can start diving into more intricate reward bookings.”
Biggest beginner mistakes
While some may be cautious, others may take a foolhardy leap into rewards before they’re ready. Making these errors will put your rewards –and financial health – on the line:
- Carrying a balance: “I would not even get started in rewards if you owe a balance on any of your cards,” Cothern says.
Rewards lure people in, but the amount you’ll earn back on each purchase is small – between 1 percent and up to 5 or 6 percent in certain categories.
“If your interest rate is 18 percent, earning cash back isn’t going to do anything for you,” Cothern says.
- Not being organized: Each card you open is a financial obligation, complete with due dates, login credentials and possibly annual fees. So make a cheat sheet. If your card offers a sign-up bonus for hitting a spending target by a certain deadline, add it to your calendar, Barrett suggests.
“We’re not talking about an intricate Excel sheet with macros,” Barrett says. “Just jot the information down.”
- Hoarding points: The most financially savvy consumers are often the most guilty of this, Barrett says. The instinct to let your savings pile up, untouched for years, generally won’t serve you in the rewards world, where devaluation of points (and even expiration) is a risk. So if you have an opportunity to redeem your points, do it.
“These points are meant to be spent,” Barrett says.
- Getting swept up by a sign-up bonus: A good sign-up bonus can start your rewards journey with a hefty pile of points. Just make sure the attached spending requirement fits into your regular spending patterns. Spending $1,000 in three months is probably quite doable if you put all your groceries and some bills on the card.
“But there are some that require you to spend $5,000 in three months,” Cothern says. “You might get yourself into really big trouble trying to hit that.”
- Redeeming the points for less than they could be worth: Going for cash or a gift card might seem like a wise choice – but not if you have a card that gives you twice the value per point when redeeming for travel.
“Watch what you’re redeeming the points for and what value you’re getting,” Cothern says.
Need help calculating the value of your points across various redemption methods? Check out our guide.
Good starter cards
Your ideal first card depends on your goals (A vacation? Cash for a splurge?). But here are some types to consider.
- Flat-rate cash-back cards: Cards that give you the same amount back for every transaction (such as the Capital One Quicksilver and the Citi Double Cash) have the advantage of simplicity, Cothern says. You can look at your spending from the previous years, do the math and know how much you’re likely to earn. The redemption process is usually streamlined for these types of cards, too – you literally cash out for statement credits or direct deposits.
“The flat cash-back cards are easy to understand, so you don’t get confused up front,” Cothern says.
- Fixed-value travel cards: In addition to generic travel cards like the Barclaycard Arrival Plus and the BankAmericard Travel Rewards card, some airline programs, have simple fixed-value point systems — your points are always worth the same amount, and you can use them for any ticket. While you can get more value out of traditional miles programs offered by legacy carriers like Delta or United, fixed-value points may be a better fit for beginners.
“There are no gimmicks,” Barrett says. “There are no reward seats limitations. You just use your points. It’s not going to take you hours to figure out.”
Hotel cards: Hotel programs are generally beginner friendly, Barrett says. If a standard room is available at a hotel, you can purchase it with points.
“Imagine a hypothetical 300-room hotel,” Barrett says. “The vast majority of those are standard rooms and if they’re not at full occupancy, you can book a hotel until the very last day. People don’t have to change the way they travel to get free hotel nights.”
- Hybrid cards: Flexible cards like the Chase Sapphire Preferred offer a good training ground for beginners, Barrett says. You can use your points like cash to book travel on Chase Ultimate Rewards, or you can transfer to various airline and hotel programs. This transfer ability means the card will grow with you – you can start with transferring to simple programs and move on to more complicated ones when you’re ready.
“You can transfer points to Southwest or Hyatt, but you could also potentially do the more traditional reward booking on United or British Airways,” Barrett says. “It gives you the option to focus on the low-hanging fruit, but also to ramp it up.”
Cothern, however, suggests holding off on cards like the Sapphire Preferred until you’re more experienced. Its wealth of redemption options can lead to rookie mistakes – and rewards regret.
“If they used up the rewards from a sign-up bonus, and a couple years later they get into travel hacking, they might think, ‘Man, I spent all those points on a gift card to Home Depot when I could have had three nights in an awesome hotel,'” Cothern says.
Cards to avoid at first
The good news is, “there’s no scary card” (as Barrett puts it) that you should steer clear of. But beginners would do well to avoid cards that limit their flexibility until they’ve played a few rounds in the rewards game.
Legacy airlines’ cards, for example, limit your destinations. While a major hotel chain may have properties in pretty much any major city (giving you plenty of redemption options), United may not fly to your intended destination.
“It’s about avoiding putting your eggs in one basket,” Barrett says. “Especially when you don’t know the lay of the land.”