Credit Cards

How Do Credit Card Rewards Work

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 16 minute read

Strong credit score holders can choose from a wide range of rewards credit cards, from no-frills retail cards to ultraluxury travel cards with eye-popping annual fees. Let’s go deeper into the benefits of these cards and how to get the most out of them.

Popular Reward Credit Card Types

The seven most common types of credit card rewards are as follows. Just keep in mind that almost always, points are accumulated only on net transactions. 

The following types of purchases do not qualify for credit card rewards:

  • Cash advances, including ATM cash withdrawals
  • Balance transfers
  • Chargebacks, including merchandise returns

For the same reason, you might not be able to earn points on other sorts of purchases. Common exclusions include:

  • Lottery tickets
  • Casino chips
  • Annual fee payments
  • Interest charges
  • Unauthorized charges

If you want to know what kinds of purchases don’t count toward rewards points, you should check the issuer’s disclosure document.

1. Credit Cards with Cash Back

Spending on a cash-back credit card earns points or reward units that may be redeemed for cash or cash substitutes like prepaid gift cards.

Cash-Back Reward Redeeming

Sometimes, awards are applied directly to your account or as a statement credit on your next payment cycle. Some cards allow rewards to be accumulated indefinitely until the cardholder makes a redemption, while others limit redemption to a specific time period or to a specific method of redemption such as a statement credit, direct deposit, or paper check. 

Non-cash redemption options are popular among issuers, and many customers appreciate the flexibility to use their rewards for things other than cash, including merchandise, trips, and even charitable contributions. 

The minimum amount you can redeem from some cards can be anywhere from $10 to $100. There are other cards that let you redeem for any sum.

The value of cash-back loyalty currency is limited to the scope of the issuing company’s rewards program. When applied as a credit to your account rather than a payment, it won’t be considered part of your minimum payment requirement.

Return Rates

You can earn an infinite amount of rewards with most cash-back credit cards. Depending on the card’s conditions and underwriting standards, the average rate of return on expenditure might range from less than 1% to more than 2%.

Annual Fees

However, annual fees are found in the highest tiers of this market segment. As an illustration, American Express’s Blue Cash Preferred® Card has a $95 annual fee yet offers 6% cash back on some transactions.

Credit Standards

In order to qualify for premium cash-back credit cards that offer rewards of 1.5% or more on all purchases, above-average credit is typically required. Those who are in the process of establishing or repairing their credit may still be eligible, nevertheless. 

There are a few different cash-back credit cards available, but one of the best options for people with less-than-perfect credit is the Capital One QuicksilverOne Cash Rewards Credit Card.

Different Cash-Back Credit Card Types

There are three common kinds of credit cards that offer cash back:

  • Cards that offer rewards in specific categories. Many rewards credit cards offer rotating bonus categories that vary on a regular schedule often quarterly. Spending in the bonus categories yields higher rebate rates than non-bonus spending. Most cards that limit spending in certain categories do so on a quarterly or annual basis. For instance, quarterly spending limits of $1,500 are imposed by both Chase Freedom® and the Discover it® for respective 5% cash-back categories. 1% cash back is earned on all category expenditures in excess of the limit. Stores like grocery stores, restaurants, petrol stations, and pharmacies are all examples of common expenditure categories.
  • Credit cards with different levels of cashback rewards. In this sense, the different levels of cash-back rewards might be viewed as permanent types of purchases. There are certain tiered cash-back cards that have annual or quarterly spending caps. Spending in the 3% bonus category (groceries) on the American Express Blue Cash Everyday® Card is capped at $6,000 per year; beyond that, all grocery store purchases earn an unlimited 1% cash back. There are typically between two and four tiers of cash back on these cards, with the highest tier offering a return of 6% or less.
  • Rewards Credit Cards That Have a Set Percentage. All purchases made with a credit card that offers a flat rate of cashback earn the same percentage reward. Returns are typically between 1% and 2%, though occasional promotions and sign-up incentives may increase this.

2. Credit Cards with Reward Points

This is the broadest category of rewards credit cards, and it includes subsets like those that offer discounts on certain purchases, like petrol and travel more on those below. 

In contrast to straight cash-back cards and travel/gas cards, however, this sort of credit card typically offers a far more varied and potentially lucrative selection of redemption choices.

Credit Card Rewards Points Redeemed

Credit card issuers’ loyalty portals or at the register with certain partners often online retailers and travel suppliers are common places to redeem points for rewards. The most obvious difference between loyalty portals and regular e-commerce sites is that the former is only accessible to cards. 

Some of these premium loyalty hubs may even let you spend cash in addition to your rewards points. You can find fewer options for redeeming your rewards points at other credit card loyalty portals.

No matter the case, loyalty points may usually be redeemed for anything from merchandise and travel to gift cards and experiences to cash and even charitable donations. Credit card rewards points may lose value if redeemed for cash or cash equivalents, in contrast to cash-back benefits.

Loyalty currency values might differ even within the same issuer’s stable, as each has its own set of restrictions. Rewards point cards are similar to cash-back cards in that cardholders can either redeem their points at any time or only once they’ve accrued a certain number of points.

Return Rates

The greater the flexibility of the rewards currency, the more challenging it is to determine a single, standard rate of return. Your return on investment (ROI) will be different based on how you spend your money and use the points you acquire.

Some credit cards impose steep fees for making noncash redemptions or transferring points to loyalty programs of other companies, such as hotels or airlines, resulting in an average redemption rate for noncash loyalty currency that is lower than the typical $0.01 per unit cash-back redemption rate. 

Amex EveryDay® Credit Cardholders, for instance, can redeem their Membership Rewards points for up to $0.01 in partner gift cards for every 1,000 points they earn on purchases made through the Membership Rewards portal. If you need further information, contact your card’s issuer.

Annual Fees

The annual fee on a credit card that earns flexible rewards points and doesn’t give a significant advantage to anyone redemption option is normally less than $100. Credit cards that are designed to reward frequent fliers with points can be an exception.

The Chase Sapphire Reserve® Card, for example, charges an annual fee of $550 but offers an extensive rewards program with premium redemption rates for travel bookings and a plethora of other goodies. This is why most people classify Sapphire Reserve as a card for redeeming travel points.

Credit Standards

In order to qualify for a credit card that offers rewards points, you often need to have above-average credit. Looser underwriting standards are typical of less generous cards.

3. Credit Cards for Gas

People with long commutes or busy family schedules can benefit from gas credit cards. Typically, high-return gas cards are issued under the name of a specific gas station chain (like Sunoco or BP) and offer bonuses or discounts only when fuel is purchased. 

These cards are great for shoppers who are disciplined enough to remember to use them every time they are reloaded, but they aren’t practical for everyday use.

Gas purchases may be designated as a “tier” or “category” on some cash-back or rewards credit cards, where the cardholder earns a bonus for using the card. At least thrice a year, for instance, gas purchases are a popular Chase Freedom category.

Using Gas Reward Points

Reward points on branded gas credit cards are often applied as statement credits against previous petrol expenditures or instant reductions at the pump. While the exact technique may vary by issuer, in most cases the cardholder doesn’t have to do anything.

The processes for redeeming gas purchased using non-branded credit cards can be more complex and may require intervention from the cardholder.

Return Rates

The return rates on branded gas credit cards are often very high, at $0.05 or more for $1 spent. The maximum return on non-branded cards is $0.05 per $1. 

Spending in bonus categories or tiers, such as nonbranded gas, typically yields the highest rewards, but these sometimes have quarterly or annual spending restrictions that reduce net returns.

Annual Fees

Typically, there is no yearly fee associated with branded gas credit cards. There are certain petrol rewards credit cards that carry an annual fee, although it’s unusual for that cost to be more than $100.

Credit Standards

If the gas credit card issuer is not affiliated with a major card network like Visa or Mastercard, the underwriting standards may be unexpectedly lax. However, the interest rates on non-network cards are typically much higher than those on premium cash-back credit cards (by as much as 15 percent).

4. Credit Cards with General-Purpose Travel Rewards

Some type of travel loyalty currency is earned by using any credit card that offers travel perks. 

There is a common misconception that branded travel cards featuring the logo of a specific travel vendor are the same as nonbranded, general-purpose travel rewards cards that earn more flexible rewards and are therefore treated the same. 

However, there are substantial differences between the two fields. Hotel and airline-branded travel cards are the most common, and we will go over both of these in turn.

Travel Rewards Redeeming

Redeemable for statement credits against previous purchases or direct award reservations that decrease or eliminate out-of-pocket expenditures, the points or miles earned with a general-purpose travel rewards card can be applied toward almost any travel transaction. 

Generic travel reward currency can usually be exchanged for other things besides travel, such as cash, cash equivalents, merchandise, experiences, and point-of-sale purchases with partner merchants. 

Loyalty currencies lose value when redeemed for anything other than travel. Confirm this with the program’s terms and conditions.

The big hotel and airline alliances sometimes provide advantageous transfer options with general-purpose travel rewards cards. The ideal transfer ratio is one in which every one of your credit card’s general points or miles transfers over to one of your partner’s points or miles. 

Because the redemption values of partner currencies might differ substantially – sometimes even exceeding the values of issuer currencies in the best-case scenario – transfers are something to consider.

Return Rates

You won’t earn more than 3 points or miles per $1 with the majority of travel rewards cards, while there are exceptions like special deals or bonus categories.

When redeemed for past or present travel expenditures, most cards’ currencies are worth $0.01 each, although certain premium cards set aside special, increased redemption values for such purposes.

One example is the Chase Sapphire Preferred® Card, which provides a 25% bonus on all travel redemptions, and the Chase Sapphire Reserve Card, which provides a staggering 50% bonus on all travel redemptions.

That increases their overall returns on trip spending from 2.5% to 4.5% and their travel redemption rates to $0.0125 per point and $0.015 per point, respectively.

Annual Fees

The world of travel rewards is full of programs that charge you an annual fee. The cost of a basic travel card might vary from zero dollars to around $100. In some situations, the fees associated with premium and superpremium cards might go as high as $1,000. 

When used to their full potential each year, the perks that come with these premium cards more than makeup for the annual charge.

Credit Standards

To qualify for a general-use travel rewards credit card, your credit score must be very high. There are a few exceptions, but they are often supplied only by less well-known starter cards that offer rather meager rewards schemes and do not charge annual fees.

5. Cards Credit for Hotels

Hotel credit cards incentivize customers who are satisfied to spend most of their hotel dollars inside the same chain. The hotels, resorts, and vacation rentals owned or operated by a specific hotel chain such as Starwood, Marriott, or Hilton are given preference when using branded hotel credit cards. 

Points are earned at a faster rate on purchases made within the issuer’s group, and there may be intermediary tiers that reward various types of spending that frequent fliers enjoy, such as those made at airlines and restaurants.

Hotel Rewards Redeeming

Spending on a hotel loyalty card can earn you points that can be redeemed for award stays at hotels and resorts that accept the program. Most redemptions can be made online or over the phone with the hospitality provider. 

The value of hotel loyalty currencies is diminished when they may be exchanged for anything other than hotel stays, such as merchandise or cash. To be sure, peruse the program’s terms and conditions.

Transfer agreements with other travel partners often airlines and car rental agencies are a feature of several hotel cards, just as they are with general-purpose travel rewards cards. While some premium all-purpose cards provide alluring 10-to-1 or even 15-to-1 transfer ratios, hotel cards’ transfer procedures are generally less than desirable.

Return Rates

The rates of return on hotel gift cards are highly variable, depending on factors including the issuing company, the spending habits of the cardholder, and the method used to redeem the card.

In the hospitality industry, it is common practice to group services and amenities into tiers, with each corresponding to a different set of redemption stipulations. 

Costs associated with award nights and room upgrades, measured in points per night, increase as you go through the hotel’s tiers.

It is not uncommon for there to be little connection between these per-night point loads and the underlying nightly tariff due to the wide range of room rates that can be determined by factors such as location, demand, season, and room type.

In general, you are doing well if you are able to redeem your hotel points for an average of $0.015 or more per point. However, the loyalty currency used by various hotel companies varies in its true worth.

Credit cards that offer greater reward rates (10 or 12 points every $1 spent, for example) typically have lower per-point redemption values.

Annual Fees

The annual fee is typically charged by hotel credit card companies. The annual cost of a basic card is usually less than $100, whereas premium and superpremium cards might charge as much as $400. 

In the same vein as the leisure travel industry at large, premium annual memberships typically come with extensive perks that more than cover the membership fee.

Credit Standards

In order to qualify for hotel reward cards, a high credit score is typically required.

6. Credit Cards for Airlines

Customer loyalty is rewarded with airline credit cards. Branded airline credit cards, like branded hotel credit cards, guarantee a higher rate of return on purchases made on flights, class upgrades, and sometimes incidental expenses made on a specific airline. There may also be a middle layer for things like eating out and staying at hotels.

Airline Reward Redeeming

Loyalty points are most useful when used for award flights on the issuing airline or one of its partners. Any requests for redemption must be made directly with the airline, typically through their website. 

When points are redeemed for things other than travel, including merchandise or magazine subscriptions (if allowed), the value of those points is typically reduced. Even when compared to general-purpose travel rewards cards, the transfer arrangements offered by airline cards are typically less desirable.

Return Rates

The rates of return on airline credit cards, like those on hotel credit cards, are highly variable depending on the rewards program’s details and the cardholder’s spending behavior.

Most airlines categorize their redemption charts according to the distance flown or the places from where the trip departs and arrives, for instance, 3,000 to 3,999 miles. 

Therefore, the actual value you get per mile redeemed depends on the specifics of your award travel, not the price you paid for your ticket. Some low-cost airlines avoid this nuanced context by giving their loyalty money a set or almost set value. 

Both Southwest and JetBlue use this method. If you prefer straightforward loyalty schemes, you may want to think about applying for either the Southwest Rapid Rewards® Plus Credit Card or the JetBlue Card, both of which charge no annual fee.

Annual Fees

Some airline loyalty cards, like the JetBlue Card for newcomers, don’t charge an annual cost although the norm in the industry is annual fees. 

Annual fees for airline credit cards typically range from around $100 to well over $500 for premium options like the Delta Reserve® Credit Card from American Express and the United Club Infinite Card. 

However, the hefty perks that come with these premium cards more than makeup for the fees, and that always includes free airport lounge access (membership required).

Credit Standards

Good credit is typically needed for airline credit cards.

7. Retail Credit Cards

Retail credit cards may be the most varied and elusive to classify of all of these options. After all, the term “retail credit card” can be used to describe any credit card that offers incentives for purchases made by merchants.

But genuine retail credit cards typically have the logo of a single business, whether it is a global behemoth like Walmart or a membership-based warehouse club like Costco or a large department store like Macy’s, or a specialty store like Cabela’s.

Some retail credit cards, like those issued by Visa and American Express, are part of large credit card networks and can be used at any store that also accepts those networks’ cards. Some cards are store specific, and can only be used within the store where they were originally purchased.

Retail Rewards Redeeming

The perks offered by retail credit cards can be as different from one issuer to the next as the cards themselves. For instance, the Target REDcardTM allows cardholders to immediately redeem their 5% reward at the register. 

Some programs will put incentives on your account automatically on a monthly, quarterly, or yearly basis. While some cards automatically apply points, others allow users the option to choose which transactions they’ll be applied to.

Return Rates

The returns on premium, non-network retail credit cards can be absolutely staggering, often reaching 10% or greater. Average returns on Visa and Mastercard retail credit cards are lower than those offered by other card networks. 

For instance, the first $7,000 spent annually on the Costco Anywhere Visa® Card by Citi earns 2% cash back, while all further purchases earn 4% cash back.

Annual Fees

Credit cards issued by retailers typically do not charge annual fees. An important caveat can be found in the warehouse club category, as members of warehouse clubs are required to pay annual dues of around $50 to $60 per person. Despite this, warehouse club cards often do not impose additional annual fees.

Credit Standards

In the same way that branded petroleum credit cards may have looser underwriting standards when operating outside of major credit card networks, branded retail credit cards may do the same when they are independently issued. But they could have more expensive financing rates.

How to Increase Credit Card Reward Earnings

It’s important to implement as many of these strategies as possible if you want to get the most out of your rewards credit card spending.

1. Pay off the entire balance each month.

In other words, if you only take one piece of advice from this list, let it be this one. If you carry a balance from month to month after your card’s introductory 0% APR promotion ends (if any), you may incur extremely high-interest rates — often greater than 10% APR and occasionally greater than 20% APR. That’s far greater than the standard return on investment for most credit card rewards programs.

2. Keep Your Payment Schedule

If you need to carry a balance from month to month, make sure to pay it off in a timely manner. If you fail to make a payment when due, you may lose whatever incentives you’ve accumulated up to that point.

3. Receive any available welcome bonus

All of the aforementioned types of rewards credit cards have sign-up incentives, which are also called welcome offers or early spend bonuses depending on the card issuer. During the introductory period, which lasts between three and four months, most cards require new cardholders to spend a certain amount. 

Make large purchases like a mortgage or car payment using your new card to quickly rack up the required expenditure during the promotional time.

4. Recognize Limitations & Restrictions

Find out how much money you can expect to earn in the various spending categories and tiers that your rewards credit card offers. 

Credit cards that offer 5% or 6% cash back on the first $6,000 you spend each year in a given category may not be the best option for people who tend to spend a lot on their cards. The opposite is undoubtedly true for frugal individuals.

5. Keep Away From Cards With Annual Fees

The value of any benefits you earn on a credit card with an annual fee is immediately diminished. An annual membership fee may be a minor inconvenience for large spenders, but it may be unavoidable in the elite rewards credit card world. 

But if you’re on a tighter budget or just don’t feel like going for a super-generous card, sticking to the fee-free options will provide you with the most flexibility.

6. Make the most of any additional benefits that could be valuable.

Points for loyalty are just the beginning. Added perks that come with premium and superpremium rewards credit cards can be worth more than the points themselves. 

Credits for future trips, access to posh airport lounges, free upgrades at hotels and airlines, peace of mind with travel insurance, special offers and discounts from partnered retailers, and other perks are all possibilities.

7. Expiration dates for Mind Point

Occasionally, rewards points accrued through credit card programs will expire. These time frames often last between six months to a year but can go as high as four or five years. 

Don’t forget to cash out regularly enough to keep the full worth of your earnings if you can’t find a suitable card without expiration dates.

8. Search for Chances to Earn Rewards at Higher Rates

The net return on expenditure can be increased by strategic purchases and limited-time deals that are only available to cardholders. 

To give you an idea, for a short time the Chase Sapphire Reserve Card awards 10 points for $1 spent on eligible Lyft purchases, which is over three times the average rate of return on travel expenditures. 

Equally attractive are the specific benefits available to Chase cardholders at the Ultimate Rewards Mall, which can be worth as much as 10 points ($0.10) for $1 spent.

Bottom Line

The rewards potential of your credit card may vary. Owning a non-rewards credit card with a low regular APR or long 0% APR introductory campaign may not sound thrilling, but it is attractive to millions of Americans who are looking for low-cost financing for large purchases like airplane tickets, furniture, appliances, weddings, and businesses.

A non-rewards credit card could be in your future if you want to temporarily carry a monthly charge without inviting financial doom. 

Since the average interest rate on credit cards is much higher than the average rate of return on spending for rewards credit cards, the net debt service savings from using a low or no APR credit card could easily outweigh the value of any rewards earned on the same amount of spending with the premium rewards card you’ve been eyeing.

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