Your first rewards card: picking one that pays you back

A rewards card sounds like free money: spend what you already spend, get something back. And for people who use it well, it is. If you pay your card off every month, a 2% cash-back card is like a 2% discount on everything you buy.

But there’s a catch the ads don’t lead with. Rewards cards tend to carry high interest rates, and carrying a balance for even a few months can wipe out a year of rewards. Here’s how to pick a first card that actually pays you back, and how to keep it that way.

The one rule that matters most

Pay the full statement balance every month. That’s it. If you do, you’ll typically pay no interest at all, because most cards give you a grace period (the time between the statement closing and the due date) when purchases are interest-free.

If you don’t, the math turns against you fast. Card interest rates, shown as the APR (annual percentage rate), are commonly in the 20s. Earning 1.5% to 2% back while paying more than 20% in interest is a losing trade.

So before choosing a card, be honest with yourself. If you’re likely to carry a balance in the next year, a rewards card isn’t the right tool yet. A card with a low ongoing rate, or simply no card while you build a small emergency fund, may serve you better.

How rewards cards work

Rewards usually come in three flavors:

• Cash back: A percentage of each purchase comes back as a statement credit or deposit. Simple and flexible.
• Points: Earned per dollar and redeemed for travel, gift cards, cash or merchandise. Values vary depending on how you redeem.
• Miles: Tied to an airline or hotel. Can be valuable for frequent travelers, less so for everyone else.

For a first card, cash back is usually the best fit. You don’t need to learn a points system, and a dollar is always a dollar.

Three types of cash-back cards

Flat-rate cards pay the same rate on everything, often 1.5% to 2%. They’re the easiest to use well. You don’t have to think about categories.

Category cards pay more, often 3% to 5%, in specific categories like groceries, gas or dining, and around 1% on everything else. They’re great if your spending lines up with the categories.

Rotating category cards change their bonus categories every few months. You might earn 5% on gas one quarter and online shopping the next, usually up to a spending cap. They can pay well, but you have to remember to activate the categories and track them.

A quick way to decide: look at last month’s bank or card statement. If one category, like groceries, is a big share of your spending, a category card could earn more. If your spending is spread out, a flat-rate card often wins.

Annual fees: usually skip them at first

Some rewards cards charge a yearly fee, sometimes modest, sometimes several hundred dollars. Those cards can come with bigger rewards and perks, but they only make sense if you’ll earn more than the fee in value you’d actually use.

For a first card, a no-annual-fee card is almost always the right choice. You’ll keep it open for years, which helps your credit history, and it costs nothing to hold even in months you barely use it.

Sign-up bonuses: nice, but read the fine print

Many cards offer a bonus, such as a few hundred dollars or a pile of points, if you spend a certain amount in the first few months. These can be genuinely valuable.

Just make sure the required spending is money you’d spend anyway. Buying things you don’t need to hit a bonus isn’t saving. And if hitting the target means carrying a balance, the interest can eat the bonus.

Traps to avoid

• Carrying a balance. Covered above, but it bears repeating. It’s the most expensive mistake.
• Deferred interest promotions. Some store cards offer “no interest if paid in full” deals. If you don’t pay it all off by the deadline, you can be charged interest back to the original purchase date.
• Cash advances. Using your card at an ATM usually triggers a fee and immediate interest, with no grace period.
• Late payments. A late payment can mean a fee, a higher penalty APR and a hit to your credit score. Set up autopay for at least the minimum.
• Overspending for rewards. If having a card makes you spend 5% more, a 2% reward leaves you behind.
• Foreign transaction fees. If you travel abroad, some cards add a fee, often around 3%, on purchases made in other currencies. Look for a card without one if that matters to you.

Getting approved for your first card

Card issuers look at your credit history, your income and your existing debts. If you’re just starting out, you may not have much history yet.

Options if you’re new to credit:

• Student cards are designed for people with limited history and often include modest rewards.
• Secured cards require a deposit that usually becomes your credit limit. Some offer rewards, and many let you graduate to a regular card after several months of on-time payments.
• Becoming an authorized user on a family member’s card can help build history, as long as they pay on time.

Many issuers offer a pre-qualification check that uses a soft credit inquiry, which doesn’t affect your score. Use it before applying, since a full application creates a hard inquiry that can lower your score slightly for a while.

Using your card to build credit

A rewards card can also help your credit score, which affects the rates you’ll pay on car loans, apartments and even insurance in many states. A few habits go a long way:

• Pay on time, every time. Payment history is one of the biggest factors in your score.
• Keep your balance low relative to your limit. Many experts suggest keeping it under about 30%, and lower is better.
• Keep the account open. The age of your accounts matters, so a no-fee first card is worth keeping for the long haul.

Who this is for

• Starting out: If you have steady income and can pay in full each month, a simple no-fee cash-back card is a great first step. Student and secured cards are good on-ramps.
• Getting established: If you already have a basic card, consider adding one that matches your biggest spending category.
• When to skip it: If you’re carrying card debt now, focus on paying that down first. Rewards won’t outrun interest.

Start here

• Look at last month’s spending and note your top two categories.
• Decide: flat-rate or category card, with no annual fee.
• Use a pre-qualification tool to see offers without a hard inquiry.
• Once approved, turn on autopay for the full statement balance.
• Set a monthly reminder to check your statement for errors.