how do credit card rewards work
Credit | Credit Cards

How Do Credit Card Rewards Work?

Between commercials, online ads, and credit card solicitations in the mail, you’ve probably already heard mention of credit card rewards. But what you may not know is how they work or why they are so incredibly beneficial. 

The idea behind credit card rewards is pretty simple, and is very similar to other rewards programs you probably already use in your everyday life. Essentially, certain credit card issuers offer rewards in exchange for responsibly using their credit card products. These rewards can be earned each time you make a purchase with the card or when you make purchases in specific spending categories, depending on the rewards program.

If earned strategically, credit card rewards can be very lucrative. For example, let’s pretend that both you and your sister spent an average of $150 a week on groceries last year for your households. You each filled your tanks every Friday, as well, at an average cost of $50 per fill-up. 

At the end of the year, you each spent $10,400 between gas and groceries. If your sister used a credit card that offered 2% back on all purchases, though, she would have gotten $208 back just on those grocery store and gas station purchases. And if she used a card that offered 6% back on groceries and 3% back on gas (as one popular rewards credit card does), she would have gotten a whopping $548 back last year in rewards alone.

Accrued awards may be redeemed in a variety of ways including cash, experiences, statement credits, gift cards, travel, or can even be donated to certain causes. In general, the more you spend, the more you’re able to earn from a rewards card.

Let’s take a look at how credit card rewards work and how to optimize these benefits.

Types of credit card rewards

Each rewards card is created a little differently, even when issued by the same company. Different card products offer different rewards options, earning opportunities, and redemption values, each of which can impact how you earn and what you should spend those rewards on once you earn them. 

Generally speaking, there are three primary categories of credit card rewards. They are:

  • Cash rewards
  • Points
  • Miles

Depending on your credit card’s exact program, these rewards can be redeemed in a number of ways. However, they are not all created equal in terms of value, so you’ll want to weigh your options before you ever cash in on your earnings.

Cash rewards

Perhaps the simplest reward option available is cash back. According to your rewards card program, you’ll earn a specific cash reward for certain purchases made on the card. 

These can most often be redeemed for a credit, which is applied to any balance you may have on the account. In some cases, you may also be able to redeem these cash rewards for things like gift cards to a preferred retailer or even a paper check.

Points

Many rewards credit cards will earn you points on your purchases, which can then be redeemed for things like cashback, third-party gift cards, or travel related bookings. You may also be able to shop through your issuer’s portal (if they have one) or by clicking on Shop With Points through Amazon.com. 

Each of these will allow you to convert your hard-earned points into cash value, which you can apply to your online purchases. However, it’s always important to note that if your card issuer offers you points as rewards on your spending, and those points have multiple redemption options, there is usually one that is a much better deal than the other(s). 

Sometimes it’s wise to save your rewards for a better redemption — like transferring points to a travel partner — than to simply take the easiest option available. Cashing points in for a statement credit may snag you $0.007 per point, for example, while a travel partner may offer you closer to $0.02 per point or more.

Miles

If you’re using a travel rewards credit card, such as an airline- or hotel-branded product, you will often find that your rewards are earned in the form of miles.

Miles redemptions options vary by issuer and card product, just as points and cash rewards will. However, miles rewards programs are often aimed at frequent travelers, and the most lucrative redemption options will usually involve travel, too.

You may still be able to redeem these earnings for gift cards, cash credits, or by shopping with points online. Oftentimes, though, your best bet is to cash those miles in for things like hotel stays, award flights, and the like. When you redeem for travel-related expenses, you’ll typically get the high possible value from each mile earned.

How to earn credit card rewards

Now that you know what rewards cards are, let’s take a look at how you can earn them. 

Sign-up bonuses

You can often snag a notable bonus offer when you sign up for a new rewards credit card, which can boost your rewards earnings from the get-go. These bonuses can be quite lucrative in many cases, with redemption values reaching well into the hundreds of dollars (especially with some of the most popular credit cards). 

You’ll typically need to satisfy certain requirements in order to actually earn this bonus. These include making an initial purchase within a certain period of time or adding an authorized user to the account. You may also need to hit a minimum spend threshold — meaning, you’ll be required to charge a certain amount to the card within a specific period of time, such as spending $3,000 in the first three months.

Be sure to read your card issuer disclosure to see exactly what you need to do to earn your sign-up bonus, and how long you have to do it. More often than not, they are well worth the effort.

Everyday purchases

Beyond an initial bonus, most of us will earn the bulk of our rewards through everyday spending. These can be earned as a flat rate across the board (X points or miles per dollar spent, for instance) or through a tiered reward system (X points per dollar spent on travel, and Y points per dollar spent everywhere else).

This is why it’s important to choose credit card rewards programs that best align with your usual spending habits. If the majority of your budget goes toward grocery bills and gas, choose a card that offers great rewards at supermarkets and gas stations. If you travel a lot for work or leisure, opt for a travel rewards credit card that offers points or miles for things like flights, checked bags, and hotel stays.

Many savvy credit card users will utilize more than one rewards program, too. For instance, you might use a card like the Blue Cash Preferred from American Express to earn 6% back on your groceries throughout the year (up to $6,000 in spending) and 3% back at gas stations. But you might also opt to purchase everything else with the Citi Double Cash, which offers 2% cash back on every transaction. And you could even use a card like the Chase Sapphire Preferred when you travel, which offers trip interruption and cancellation coverage at no additional charge.

Promotional bonuses

Occasionally, a card issuer will offer a promotional bonus for existing cardholders, which gives you the opportunity to snag even more rewards than you normally would for your everyday spending. These promotional bonuses can vary in value and requirements, but be on the lookout for email and in-app notifications to see how you can earn rewards.

Sometimes, promotional bonus offers involve adding authorized users to your account, and may require them to also make a purchase with their new card. Once that authorized user is added and/or makes their first purchase (they are sometimes required to spend a certain amount in a specific period of time), your account will be credited with bonus rewards. 

This can be a great opportunity if you have someone trusted that you’re willing to add to your account, such as a spouse or parent. Just be sure to note that you, as the primary account holder, are still ultimately responsible for any balance on the card… even if your authorized user is the one who made the purchases.

Shopping portals or browser extensions

Chances are, you already shop online. If you shop through certain card issuers’ shopping portals — or use their browser extensions when visiting certain online stores — you can snag extra rewards on top of what you would have earned on the purchase anyway.

With Shop Through Chase, for example, you can click through to hundreds of popular retailers. When you make a purchase, you’ll not only earn the rewards you would have already gotten for the transaction, but you’ll also earn bonus points depending on the promotion going at the time. 

These bonuses can be significant, too, boosting your rewards by anywhere from 2x to 20x your usual earnings. Some bonus offers are based on each dollar spent, while others are a flat-rate bonus just for completing a purchase with a specific retailer.

Milestones

After you’ve held a certain credit card for a period of time — and have responsibly managed your account — you may be given a milestone, or anniversary, rewards bonus. These bonuses are offered every year or two in many cases, and encourage cardholders to remain loyal customers while also boosting their rewards. 

One example of this is the Southwest Airlines Rapid Rewards Plus Credit Card. With this card, you’ll earn 3,000 anniversary points each year that your account remains in good standing, in addition to any sign-up bonus or points earned on purchases throughout the year.

Referrals

Love your rewards credit card? Tell your friends and family about it — it can mean bonus reward points or miles in your account when they open their own card.

Most card issuers offer referral bonuses to existing customers, in exchange for referring new creditworthy customers to the company. So whether you’re telling new folks about the product or just know that your mom has been wanting to open a new travel credit card for a while now, this can be a great way to bulk up your rewards balance.

You’ll need to find out how referrals are tracked by your card issuer, to ensure that you’re given credit. In many cases, your issuer will allow you to send texts or email with a special referral link. You may also be given a unique alphanumeric code that your friend can reference when opening their new account.

Referral bonuses usually aren’t applied until your friend or family member’s new account is open, active, and, sometimes, until an initial purchase is made. Then, you’ll typically see the reward points deposited into your account within a few weeks’ time. 

Tracking your credit card rewards

As you begin to earn rewards points, you’ll probably want to track your progress. Credit card issuers generally make this pretty easy to do.

Statement

Each month, you’ll receive a credit card statement from your issuer, whether this is sent paperless or through the mail. On this document, you’ll generally find information about your account balance, new charges posted to the card, your interest rate, and your rewards points.

Your monthly statement will show any new rewards earnings from purchases during the latest billing cycle. It’ll also note any recent bonus earnings as well as points redemptions, like if you’ve chosen to cash points in or transfer them to a partner program. And with some issuers, you’ll even get a complimentary credit score.

Mobile app

Many of us manage our financial accounts through mobile apps these days. If you have a credit card, chances are you’ll be able to track and manage this account through a smartphone app, too.

Mobile apps will typically enable you to see account snapshots such as your outstanding balance, last payment, recent purchases made with the card, your most updated credit score, and a current reward points. You may also be able to view upcoming rewards points, pending point redemptions, and certain redemption options.

Do credit card rewards expire?

So, what if you’ve worked hard to earn a nice reward points balance, but don’t plan to actually redeem those points anytime soon? Maybe you’re just waiting for the right redemption options to come available, or perhaps you’re saving to redeem all of those points for one really fantastic hotel stay or trip.

Either way, if you’re not redeeming your reward points regularly, you might be worrying that they could expire. And considering that many brand-specific loyalty programs — such as airline and hotel travel rewards — do expire over time, this is a valid concern.

Luckily, as long as your card account is active and stays in good standing, earned reward points generally won’t expire. You can save them up and redeem them whenever you’re ready, need to travel, or the right offer comes along. 

Just note that most rewards are subject to devaluation over time. This means that your redemption value could change over the weeks or months it takes for you to save your points or miles, if your card issuer decides to change its rewards program. 

How to redeem credit card rewards

There are many different ways to redeem your credit card rewards, though your options will vary based on the program you participate in, the card(s) you carry, and even the number of points you’ve earned.

Redeem for cash

Perhaps the simplest redemption option is to just trade your rewards in for cash. The majority of reward points programs offer cash redemption as an option, while certain cashback credit cards only let you redeem rewards for cash. 

Generally, cash redemptions are given as a statement credit, which reduces the total amount due on your credit card. If you’d prefer, you can often request a paper check, as well.

Cash redemptions may be simple, but they are not usually the most lucrative choice. 

Redeem for merchandise

Some rewards programs will allow you to redeem rewards points for merchandise, either through their own shopping portal or through a third-party platform. This is different from shopping with points (which we’ll discuss in a second).

Redeeming rewards for merchandise is easy, but often comes with a low redemption value. You are only able to choose between which products appear in your issuer’s catalog or online store, and these may be offered at a higher price than you could buy them elsewhere.

Redeem for gift cards

Most programs will allow you to cash in your points for gift cards, if you’d prefer. These gift cards are generally available for third party companies, and may be sent to you through the mail or as a digital eCertificate. 

Some credit card companies, like Discover, will have gift card redemption bonuses or “added value” special offers. You might be able to get an additional 10% or 20% on top of your card value, or even double the value in some cases (i.e. getting $40 for a $20 redemption). 

If it’s a place you’d shop anyway, and you’re able to snag an enviable offer, the added value might be worth redeeming your points for. Typically, though, redeeming points for gift cards isn’t offered at a much higher value than redeeming points or miles for statement credit/cash.

Redeem for travel

Many credit cards (especially travel card products) allow users to redeem their points for travel expenses. This is usually done in one of two ways:

  • As a credit for eligible travel expenses already charged to the account; or
  • By purchasing hotel stays, flights, rental cars, cruises, etc. directly through a card issuer’s travel portal.

If you book through your card issuer’s travel platform — such as the one offered by Chase Ultimate Rewards — you can cash your points or miles in directly for travel-related bookings. Rates are usually similar to what you could find by booking direct or through travel aggregator platforms, though some credit card companies offer redemption bonuses when you go this route.

For example, if you have a Chase Sapphire-branded card and book through the Ultimate Rewards platform, your points will be worth an additional 25% or 50%. This means that 100,000 points — which would be worth $1,000 in cash — would be worth $1,250 or $1,500 toward travel, depending on which Sapphire card you have.

Transfer to travel partners

Perhaps the redemption option with the most potential value is transferring to an airline or hotel travel partner.

Not all rewards programs have travel partners, but Chase, American Express, Citi, and Capital One all do. Each of these issuers has a number of different credit card products that you can use to earn points; in many cases, you can even have more than one card that earns points within the same program. 

Transferring points to a travel partner is a great way to squeeze even more value out of your rewards. For example, you might be able to snag a Las Vegas to Miami award flight through a partner airline for 10,000 miles each way, or 20,000 miles round-trip. If this partner airline has a 1:1 transfer, that means redeeming 20,000 points or miles from your rewards card balance (approximately $200 in cash value). 

In the summer months, the flights along this route average around $600 round-trip. Rather than redeeming your points directly for $600 worth of travel, or cashing them in for a $600 statement credit, you could transfer only 20,000 points to a partner airline and get the same flights for much less.

Pay with points

Shop With Points is a recent addition on Amazon.com, and allows shoppers to make purchases with rewards points from various programs. Once you’ve connected your rewards card to your Amazon account, you can opt in for Shop With Points, which enables you to redeem your rewards for cash value towards your order.

The convenience factor is really the selling point here, since the redemption rate will be the same as your cashback option. 

Donate your points

Some issuers will allow you to donate your points to charity, directly through their platform. While this is a generous option, the redemption rate isn’t generally much (if at all) better than cashing in for a statement credit.

Your best option may be to redeem your rewards for the highest value possible, then donate to your favorite charity with cash. You can still do just as much good but also ensure that every dollar goes exactly where you want it (and you can write off the donation, too).

Things to keep in mind

When using a rewards card to earn cashback, points, or miles, there are a few things to keep in the back of your mind.

Annual fees

Many of the best rewards cards charge an annual fee. This fee — charged every 12 months and applied to your account — can be anywhere from a few dollars to well into the hundreds.

While paying an annual fee to use a credit card can seem counterintuitive, it can be well worth the expense. As long as you’re earning more in rewards than you’re spending on that annual fee, the card is worth considering. Just be sure to do the math and figure out how much you’ll likely earn each year (with your usual spending habits) and how much the annual fee is, to ensure you’ll come out on top.

Finance charges

If you don’t pay off all of your purchases (your full statement balance) each month, you’ll likely be subject to interest, or finance charges, on your credit card balance. These charges can be significant, and can easily negate any rewards you may have earned by making those purchases. Plus, carrying a balance on your card(s) can impact your credit score!

Ideally, if you want to get the most value out of your credit card each year, you’ll want to avoid finance charges at all costs.

Bottom line

Spending on a credit card that rewards you for your purchases can be a great way to rack up points, miles, or cash back. The right program for you depends on the spending categories you’ll use most, what you spend each year, and how you plan to redeem the points you earn. 

In some cases, it might even make sense to use more than one credit card, depending on whether you’re grocery shopping, buying gas, going to restaurants, traveling, or just buying everyday items. That way, you can maximize the rewards you earn and the perks you receive.