How Credit Card Points & Rewards Work

What are credit card rewards?

Credit card rewards programs are an incentive for cardholders to put everyday purchases on a specific credit card. By offering valuable perks and rewards like cash back, miles, or points, banks encourage you to use their credit cards for spending.

Credit card rewards can be redeemed for statement credits, merchandise, travel, and more. To maximize these benefits, it's essential to understand how these programs work to align them with your spending habits and overall financial situation.

3 types of credit card rewards

Cash Back

Cash back rewards are popular due to their simplicity. You earn a percentage of your spending back as a cash rebate, typically redeemable as a statement credit, bank deposit, or check. Cash back is sometimes earned as points with a fixed value, most often 100 points = $1, or 1 cent per point.

Cash back earning rates vary by spending category and card, but typically range from 1-5%. For example, some of the best cash back credit cards offer 2% cash back on all purchases with no annual fee.

Few cash back credit cards include additional cardholder perks, which are more common with Miles or Points credit cards.

Miles

Miles-based rewards programs are targeted toward frequent travelers by offering perks such as free checked bags or discounted in-flight purchases.

Banks partner with airlines and hotels to link your credit card spending to your existing loyalty programs. You earn airline miles or hotel points for each dollar spent, which automatically transfer to your frequent traveler account after each billing period ends.

Miles earned from credit card spending are typically no different than miles earned from travel, and can be redeemed for flights, hotel stays, and other travel-related expenses. Since these programs are tied to specific airlines or hotels, the miles you earn usually cannot be transferred to other travel partners.

Points

Points-based rewards programs are often targeted toward aspirational travelers, as they can provide outsize value when transferred to travel partners to be redeemed for flights and hotels.

In addition to earning points for each dollar spent, cardholders can benefit from perks such as airport lounge access and TSA PreCheck/Global Entry statement credits.

Unlike miles, rewards earned from points credit cards remain with the bank until they are redeemed. This provides you flexibility by not limiting you to a single airline or hotel, as you can typically redeem credit card points with a range of travel partners. Points can also be redeemed for merchandise, gift cards, and other options through the credit card issuer's rewards portal.

The value of transferable points varies depending on how you redeem them, typically ranging from 0.5 to 2.0+ cents per point. Unsure what your points are worth? Check the value of your points with our Points Value Calculator.

How to earn rewards

Everyday purchases

The primary way to earn rewards is by using your credit card for everyday purchases. This includes groceries, gas, dining, and online shopping. The more you use your card, the more rewards you'll accumulate.

Credit cards are widely accepted and, if used responsibly, can earn you rewards without any additional cost to you. However, it's important to avoid overspending just to earn rewards, and carrying a balance will incur interest expenses that will more than offset the value of any rewards.

Sign-up bonuses

Many credit cards offer lucrative sign-up bonuses to attract new customers. These bonuses typically require you to spend a certain amount within the first few months of opening the account. Sign-up bonuses can significantly boost your rewards balance quickly, but you should make sure you can hit the minimum spend threshold without going beyond your normal spending needs.

Special promotions

Credit card issuers frequently run promotions offering additional rewards for specific spending categories or during certain periods. These promotions can provide an excellent opportunity to earn extra rewards if they align with your spending.

Redeeming rewards

Travel

Travel is one of the most popular ways to redeem rewards points and miles. You can book flights, hotels, car rentals, and vacation packages through your card issuer's travel portal or transfer points to airline and hotel loyalty programs.

Example: Redeeming 70,000 points for a one-way business class flight from North America to Europe can provide significant value compared to the cash price of the ticket.

Ready to redeem, but need help finding an award flight? Learn how Rational Points can save you time and get the most value for your points with our award flight search service. If you already have a flight or hotel stay in mind but aren't sure if it's worth it, check the value of your points redemption before booking.

Merchandise and gift cards

Many rewards programs offer a variety of merchandise and gift cards for redemption. While these options provide flexibility, they often don't offer as much value as travel redemptions.

Example: You might redeem 1,000 points for a $10 gift card to a popular retailer.

Cash Back and Statement Credits

For those who prefer straightforward rewards, cash back and statement credits are ideal. You can apply your rewards directly to your credit card bill, reducing your outstanding balance, typically at a rate of 100 points = $1 for cash back credit cards.

While most transferable points can also be redeemed for cash back, they typically lose significant value compared to using them with travel partners, so make sure you understand the redemption rate beforehand.

Choosing the right rewards card

While many issuers claim to offer the best rewards cards, selecting the right rewards card for you depends on your spending habits and reward preferences. Consider the following factors:

• Spending categories: Choose a card that offers high rewards rates in the categories where you spend the most.
• Annual fees: Evaluate whether the card's benefits you'll use outweigh the cost of its annual fee.
• Redemption options: Ensure the card's redemption options align with your goals, whether it's travel, cash back, or merchandise.
• Sign-up bonuses: Consider the value of the sign-up bonus and whether you can meet the spending requirement without expanding your budget.

Not sure where to start? Use our Credit Card Selector to find the best credit cards based on your spending habits and redemption goals.

Common pitfalls to avoid

Not paying your balance in full

To truly benefit from rewards programs, pay your credit card statement balance in full each month. Carrying a balance and incurring interest charges can quickly negate the value of the rewards you earn.

Overspending for rewards

It's easy to fall into the trap of overspending to earn rewards. Stick to your budget and avoid unnecessary purchases just to accumulate points or miles.

Missing payments

Late payments can lead to fees and interest charges, diminishing the value of your rewards. Set up automatic payments or reminders to ensure timely payments.

Ignoring annual fees

Ensure the rewards and benefits of a card justify its annual fee. If you're not getting value from the card's perks, consider switching to a no-fee or lower-fee alternative.

Not understanding redemption values

Different redemption options offer varying values for your points and miles. Research and choose the most valuable redemption method to get the best return on your rewards.

Letting points and miles expire

Some rewards points and miles have expiration dates, although having an active credit card tied to a program typically extends or waives the expiration. Keep track of your rewards and use them before they expire to avoid losing their value.

Conclusion

Credit card rewards programs offer a fantastic opportunity to earn benefits from your everyday spending. By understanding how these programs work and implementing strategies to maximize your rewards, you can enjoy significant savings and perks. Choose the right rewards card, use it responsibly, and stay informed about promotions and best practices to make the most of your credit card rewards.