Different Types of Credit Cards Explained & How to Choose the Best Rewards Credit Card

August 19, 2022
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Credit Cards
Rewards

With more credit card types than ever to choose from, it’s easy to feel overwhelmed and confused—especially when all these types of credit cards come with their pros, cons, and unique features!

The world of personal finance can really make your head spin.

No need to worry, though! We have all the information on the different types of credit cards out there, with this article covering in detail all you need to know about credit cards that offer the best financial benefits and rewards.

So, what types of credit cards are there, how do they work, and which is the best option for you? Let’s have a closer look.

3 Most Popular Credit Card Types You Can Use for Your Benefit

What makes reward-based credit cards so popular is that they allow you to earn some of your money back when you spend.

Going on a shopping trip? Buying groceries? Traveling? Why not use a credit card geared towards offering financial benefits, and get some of that money back while you’re at it?

Reward-based credit cards give you the chance to financially benefit from making purchases you would have completed anyway, such as stocking up on household supplies, filling up on gas, or flying abroad to visit your relatives.

Here are the three most popular rewards credit cards:

  • Cash-back credit cards
  • Points credit cards
  • Travel credit cards

The benefits you get vary based on what type of credit card you have and who your credit card issuer is. For instance, you could be getting:

  • Cash-back
  • Discounts
  • Airline miles
  • Hotel points

If you choose to get a rewards credit card, make sure you can pay off your balance in full at the end of each month. This will help you build your credit score. It’s also a good way to avoid accruing interest on the balance carried over, which could otherwise cancel out any rewards you have earned.

Let’s unpack the specifics of each credit card type that rewards you for spending in one way or another!

rewards credit cards

Cash-Back Credit Cards

Cash-back credit cards allow you to earn back a certain percentage of every qualifying purchase. While some credit cards reward their customers with points, gift cards, or miles, this credit card type does exactly what the name says it will—it gives you cash.

You can then redeem your cash in multiple ways, including online purchases, statement credits, or depositing the cash into a linked checking or savings bank account.

This credit card would be ideal for someone who is:
  • Looking to gain financial benefits from regular spending
  • In search of their first rewards credit card – cash-back cards are easier to understand than some other types of credit cards
Pros of cash-back credit cards:
  • Typically no annual fee
  • Shopping perks (e.g. return guarantees, extended warranties, and more)
  • Cash rewards
  • May have a sign-up bonus
Cons of cash-back credit cards:
  • Possible earning caps (for no earning cap, choose an unlimited reward credit card)
  • Few to no travel rewards
  • High ongoing APR (annual percentage rate – this is the yearly interest rate on your card)

There are different kinds of cash-back credit cards you can choose depending on your needs:

Flat-rate cash-back cards

The most common type of cash-back credit card is a flat-rate card because it works on a very simple basis: You receive the same percentage rebate on each dollar you spend no matter the category.

The usual rate is 1.5% to 2% cash back per dollar. For instance, a card that offers 2% cash back will reward you with $2 per every $100 you spend. Flat-rate cards are great cash-back credit cards for online shopping as well as your typical weekly trips to the grocery store.

Tiered cash-back cards

Unlike the flat-rate card, a tiered card – otherwise known as a cash-back credit card with bonus categories – will reward you differently based on which category you’re spending in.

If you spend a large portion of your monthly balance on dining out, for example, you might benefit from a tiered cash-back card that classifies dining as one of its higher reward categories. The cash-back rate will be higher then.

Rotating bonus category cash-back cards

With a rotating bonus category card, you will usually receive 1% cash back on each purchase – except for the quarterly bonus categories that tend to offer 5% cash back.

Bonus categories can include restaurants, live entertainment, grocery stores, gas, and more.

Points Credit Cards

Points credit cards allow you to collect points on all qualifying purchases. These points can then be redeemed in a variety of ways, such as for hotel points, travel rewards, or gift cards.

This credit card would be ideal for someone who is:
  • A fan of luxury travel (points can be used for promotions to business class on airplanes or hotel room upgrades)
  • A businessperson looking to redeem points in specific categories targeted at businesses, such as office supplies
Pros of points credit cards:
  • An opportunity to redeem points for a higher value service or item
  • Travel rewards
  • Exclusive privileges (e.g., car rental insurance, no liability on unauthorized charges)
  • May have a sign-up bonus
Cons of points credit cards:
  • No instant cash back
  • The points currency may be devalued before you can redeem your points
  • It’s more complex to learn how the program works than with cash-back cards
  • Breakage (you forget to redeem your points - almost 3 in 10 people actually never redeem their credit card rewards)
  • High ongoing APR (annual percentage rate – this is the yearly interest rate on your card)

Tip: If you always shop in the same store, try looking into co-branded credit cards. It’s a hybrid card in the name of both your favorite merchant and a bank, and it can get you great discounts, hotel points, and airline miles.

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rewards credit cards

Travel Credit Cards

A travel credit card is a perfect option for travel enthusiasts because you can use it to get free flights, discounted hotel stays, and other travel benefits.

Ever wondered what it feels like to have access to an exclusive airport lounge? A travel credit card gets you closer to a first-class promotion on a flight, a hotel room upgrade, a free breakfast—your vacation has suddenly gotten much more comfortable.

This credit card would be ideal for someone who is:
  • Dreaming of a luxury vacation for free or for discounted rates
  • Frequently traveling on a low-budget and is looking for more ways to lower their expenses
Pros of travel credit cards:
  • Travel rewards
  • Additional points in travel categories (e.g., car rentals, flights, hotels, taxis)
  • Travel portals (where you can directly redeem your points for travel bookings)
  • May have a sign-up bonus
  • Waived foreign transaction fees
  • Possible extension of travel perks to authorized users, not just cardholders
Cons of travel credit cards:
  • High annual fees
  • Good to excellent credit score requirements
  • High ongoing APR (annual percentage rate – this is the yearly interest rate on your card)
  • The points currency may be devalued before you can redeem your points
  •  Breakage (you forget to redeem your points)

Tip: If you’re looking to get a travel credit card and need to improve your credit score first, consider getting a secured card that will help you build credit. 

You can get different travel credit card types based on what kind of travel rewards you’re after:

Earn miles with your travel credit card

If you want to focus solely on flights, a miles card might be the way to go. This credit card type is usually co-branded, which means it’s under a specific airline’s name and it lets you earn frequent-flyer miles each time you pay with your card.

While co-branded travel credit cards often offer some amazing perks, such as flight discounts, lounge access, or free checked bags, they aren’t the most flexible option out there. It’s worth getting a miles travel credit card if you frequently fly with a specific airline, though.

Earn points with your travel credit card

If you choose to use a general travel credit card, chances are you’ll be earning points. This means you’re not bound to a single airline.

You’re free to use your travel points in a variety of ways – transfer your points to airline and hotel rewards programs, book your trip directly through the credit card issuer, or redeem your points for statement credit against qualifying travel purchases.

Whilst this credit card type doesn’t come with the same perks that a miles card does – free checked bags are a great financial benefit, after all – it allows you to be more flexible with your travels.

What Is the Best Credit Card for Me? 3 Most Important Questions Answered

“What type of credit card should I get?” In a world where you’re constantly bombarded with ads for so many different types of credit cards that you can’t even keep track of them anymore, this is a very common question.

What is the fastest, easiest way to determine the best card for you? And why do you need a credit card anyway?

Let’s answer your questions!

Q: Why do I need a credit card?

A credit card can increase your credit score if you use it in a responsible manner. It also offers better fraud protections than a debit card, and it’s safer to carry than cash.

A rewards credit card also lets you earn some of your money back in cash or points, making it a financially beneficial option.

Q: What type of credit card should I get?

It always depends on what your situation is. There are all types of credit cards, and each person has different needs and priorities in different life stages. Young adults need different types of cards than business owners, for example.

Aside from rewards credit cards, there are many more credit cards to consider:

  • Student credit cards – ideal for young people with little to no credit history
  • Secured credit cards – the easiest cards to be approved for after you put down the required cash deposit in order to secure credit
  • Business credit cards – perfect for business owners who want to earn rewards on their business spending while keeping their personal and business expenses separate
  •  Private label cards – intended for use at a specific store, helping reward loyal customers
  • Balance transfer credit cards – the best card to use when you want to manage your credit card debt
Q: How many credit cards should I have?

While the average American has four credit cards, there is no clear-cut answer to how many credit cards you should optimally own.

If you have too many credit cards, it can become difficult to repay all your debt on time, which could negatively affect your credit score. However, it’s sometimes beneficial to combine different types of rewards cards to get the best deals in all spending categories.

No matter how many credit cards you decide to have, always make sure you’re able to manage them well and make all debt repayments on time.

Final Thoughts on Credit Card Types

Using rewards credit cards can bring many benefits, from free flights to brand discounts, instant cash back, luxury travel experiences, and more.

Deciding which types of credit cards to go for can feel like too much sometimes, but Lever is here to take some of that burden off your shoulders. Download the Lever extension and let the tool compare different credit card deals for you as you enjoy a stress-free online shopping experience.

Lever is your wallet’s best personal assistant. Instead of navigating complex loyalty programs, let this Chrome extension automatically apply the best rewards card to your online purchases with as little as a press of a button.

And remember – when choosing which credit card to get, always consider your current situation, your credit score and credit history, what you’re looking to get out of the program, and if you can manage all your credit cards well.

Credit cards can be a wonderful thing if you know how to use them in the best way possible.

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