Understanding Credit Card Rewards Programs

Credit card rewards give you something back for spending you’d do anyway: cash back, points, or airline and hotel miles. They’re genuinely useful if you pay your balance in full every month. If you carry a balance, interest at today’s average of about 22% will cost you far more than any rewards program earns, so focus on a low rate instead.

The three main types

Cash back. You earn a percentage of what you spend, either a flat rate on everything or higher rates in certain categories. It’s the simplest: cash is cash, and you can usually apply it as a statement credit or deposit it to a bank account.

Points. Issued by the card’s bank and redeemable for travel, gift cards, merchandise, statement credits, or transfers to airline and hotel partners. The value of a point depends on how you use it. A point might be worth a cent as cash back, less as merchandise, and sometimes more when transferred for a well-chosen flight.

Miles and hotel points. Co-branded with a specific airline or hotel chain. They can be valuable if you’re loyal to that brand, and often include perks like free checked bags or room upgrades. They’re less flexible if your plans change.

How you earn

• Flat-rate cards pay the same on every purchase. They need no tracking.
• Category cards pay more on things like groceries, gas, dining, or travel, often with a cap on bonus earnings.
• Rotating category cards change their bonus categories every quarter and may require you to activate them each time.
• Sign-up bonuses reward you for spending a set amount within the first few months. They can be worth a lot, but only if you’d have spent that much anyway. Buying things to hit a bonus isn’t saving money.

How to compare cards

Do the math with your own spending. Look at the last few months of statements and estimate a year:

• Groceries: $6,000
• Gas: $2,000
• Dining: $1,500
• Everything else: $8,000

Then calculate what each card would earn on those amounts, subtract any annual fee, and compare. A card with a $95 fee needs to earn at least $95 more than a no-fee card just to break even. Many people find a simple flat-rate card does about as well as a fancier one once fees and effort are counted.

Getting the most out of them

• Pay in full every month. This is non-negotiable. Interest erases rewards almost immediately.
• Use one or two cards, not ten. Juggling many cards adds complexity and the risk of missing a payment.
• Redeem regularly. Programs can change their terms, devalue points, or close. Points sitting for years aren’t earning anything.
• Know the expiration rules. Some points and miles expire after a period of inactivity. Most bank points are forfeited if you close the card, so redeem first.
• Check the redemption value before cashing in. If points are worth a cent each as cash back but half that as merchandise, take the cash.

When rewards aren’t worth it

• You carry a balance from month to month.
• The rewards tempt you to spend more than you would otherwise.
• You’re paying an annual fee for perks you rarely use.
• You’re building credit and need the simplest possible card. Get your history established first.

If any of these apply, a low-rate or simple no-fee card is the better tool. Choosing the Right Credit Card walks through the full comparison, Traveling With Credit Cards covers using travel rewards abroad, and Managing Credit Card Fees and Charges explains the costs to weigh against rewards.

Sources

• Federal Reserve: G.19 Consumer Credit (credit card interest rates)
• FTC: Comparing credit, charge, secured credit, debit, or prepaid cards
• Experian: Cash back, points and miles: what’s the difference?

This article is for educational purposes and is not financial advice.