While there are numerous pitfalls to avoid along the way, rewards credit cards offer an elusive guarantee — the promise of “free stuff” for consumers who play by the rules. All that’s required to earn free perks is signing up for a rewards or travel credit card and using it the right way. Make purchases with your card, pay your balance in full each month and — voila — you’ve racked up cash or travel rewards to spend.
But there’s more to the rewards game that meets the eye, and there’s a lot to know before you dive right in. It’s crucial to understand the different types of rewards cards available before you settle on a new card for starters, but you also need to know how to make the most of your rewards once you’re ready to cash in.
Sound complicated? That’s because it is. Fortunately, you’re in the right place to learn all there is about credit card rewards and how they work.
How do credit card rewards work?
First things first. How do credit card rewards work in the real world? While there are some exceptions, every card you’ll come across offers a similar value proposition.
Once you sign up for a rewards credit card, you typically earn a set number of rewards points for each dollar you spend. Some cards offer more points in specific bonus categories like groceries, travel or dining, and others offer a set rate of rewards.
Because different rewards credit cards offer different rewards currencies, however, all points are not created equal. Where you may only get .05 cents in value per point with a hotel program, other cards may let you cash in points for gift cards or statement credits for one cent each. If you’re using a rewards credit card that gives you airline miles, on the other hand, you may get 5 cents or more in value for each mile you redeem —then again, that depends on the specific flight you redeem them for.
Confused yet? It’s normal to find these details overwhelming, but it helps if you understand the different types of rewards you can pursue and the cards that offer them.
Types of rewards you can pursue
Now that you know how rewards work in general, it’s time to go over the different types of credit card rewards programs you’ll encounter and the cards that administer them:
Some rewards credit cards focus on letting you earn cash back in the form of statement credits on your account, although some cash-back credit cards could allow you to redeem points for gift cards or merchandise. Among credit cards that fall into this category, you’ll find cards that offer a flat rate of rewards for each dollar you spend — usually 1% or 1.5%. However, you’ll also find cash-back credit cards could give you more points when you spend on groceries, gas, dining out, and other popular categories.
Example 1: The Chase Freedom® credit card lets you earn 5% back on the first $1,500 spent (after opening your account) in rotating bonus categories that change each quarter. Then it moves to 1%, plus 1% back on all other purchases. You also get a $150 cash bonus after you spend $500 on purchases within three months of account opening — and all with no annual fee. On the redemption side, you can cash in your points for statement credits, gift cards, or merchandise through the Chase Ultimate Rewards portal.
Example 2: The U.S. Bank Cash+™ Visa Signature® Card gives you 5% cash back on your first $2,000 in combined eligible net purchases ($100 per quarter) on two categories you choose. Combine that with the $150 bonus after spending $500 in eligible net purchases within the first 90 days of account opening and you could earn up to $550 cash back in the first year.
Airlines like Delta, United, American, and JetBlue also work with card issuers to offer co-branded credit cards that offer airline miles for each dollar you spend. Airline credit cards could earn you miles within a specific airline loyalty program, although you may also be able to redeem those miles for flights on partner airlines. A handful of airline loyalty programs could let you redeem their miles for hotel stays, rental cars, or merchandise, but you usually receive less value that way.
Example: The Citi® / AAdvantage® Platinum Select®World Elite™ Mastercard® makes it easy to earn miles within the American AAdvantage program. This card gives you 60,000 miles after you spend $3,000 on purchases within three months of account opening. You also earn 2 miles per $1 on American Airlines purchases, restaurant, and gas station spending. Plus, you get 1 mile per $1 on other purchases along with free checked bags on some itineraries, and no foreign transaction fees. The $99 annual fee is waived the first year.
Hotel loyalty points
Many of the top hotel brands partner with card issuers to offer their own co-branded rewards credit cards. These cards could earn you points good for hotel stays, room upgrades, and other perks within specific hotel brands such as World of Hyatt, Marriott Bonvoy, and Hilton Honors. You can usually only use hotel points for hotel-related travel, but a few programs might allow you to exchange points for airline miles or book travel packages with hotel and air included.
Example: The Hilton Honors American Express Ascend Card grants you 125,000 Hilton Honors points after you spend $2,000 on purchases within three months of account opening. You also earn 12X Hilton Honors points on Hilton hotel spending, 6X Hilton Honors points at U.S. restaurants, U.S. gas stations, and U.S. supermarkets, and 3X points on other qualifying purchases. There’s a $95 annual fee, but you do get additional perks like automatic Hilton Gold status and free weekend night awards after you spend $15,000 on your card within a calendar year.
Some rewards cards don’t make you choose which types of points you want to earn. Instead, they offer flexible points you can use in more than one way. Flexible rewards credit cards tend to be the most popular since you have the option to redeem them for statement credits, gift cards, merchandise, or travel. The best flexible travel credit cards on the market today also let you transfer points directly to airline and hotel loyalty programs for superior value.
Example: The popular Chase Sapphire Preferred® gives you 60,000 points worth $750 in travel through the Chase portal after you spend $4,000 on purchases within three months of account opening. You also get 2X points on travel and dining spending and 1 point per $1 on other purchases. You can cash in your points for statement credits and high-value gift cards at a rate of one cent per point, but you can also redeem for merchandise from Amazon or Apple. More importantly, this card lets you redeem points for travel through the Chase portal or transfer 1:1 to popular programs like World of Hyatt, Southwest Rapid Rewards, United MileagePlus, Marriott Bonvoy and others. A $95 annual fee applies.
Flexible travel credit
Finally, don’t forget about cards that let you earn flexible travel credit. Cards that offer this type of rewards currency let you earn a flat rate of points for each dollar you spend and redeem them for travel expenses at a rate of one cent per point. Many consumers like this type of program since you can cash in rewards for any type of travel you want without worrying over blackout dates or rewards program rules.
Example: The Barclaycard Arrival® Plus world Elite Mastercard gives cardholders 2X “miles” for each dollar they spend in addition to 70,000 bonus miles after they spend $5,000 within three months of account opening. You can redeem these miles for any travel expenses over $100 (10,000 miles) at a rate of one cent per point, meaning the welcome bonus alone is worth $700. An $89 annual fee applies, but it’s waived the first year.
Tips to get the most out of your rewards
Credit card rewards can help you score easy spending money or travel the world, but you’ll get more bang for your buck if you know what you’re doing. Here are some tips to help you maximize your rewards and avoid the pitfalls of credit cards.
- Never pay credit card interest: A recent study from Experian noted that only 45% of credit card customers pay their balances in full each month. If you hope to benefit from earning points and miles, you have to pay your credit card bill in full regularly and avoid credit card interest like the plague. Keep in mind that the average credit card interest rate is well over 17% while the average rewards card only offers 1% to 3% back at most.
- Sign up for rewards you can actually use: It’s easy to think all rewards credit cards will leave you better off, but this couldn’t be further from the truth. You won’t have any luck with airline miles if you never travel, am I right? Before you sign up, think long and hard about the type of rewards that would benefit you most. That may be something simple like cash back, but you could always go with a flexible rewards card if you’re unsure.
- Create a rewards “game plan”: It can also help to create a roadmap for your rewards game before you sign up for too many cards. If your goal is covering a vacation with rewards points, for example, you could sit down and map out which type of points you’ll need to earn to make it happen. From there, figure out which cards to sign up for and how long it will take to earn the rewards you need.
- Maximize welcome bonuses: The fastest way to reach any rewards goal is through credit card welcome bonuses — a.k.a. signing up for new rewards credit cards. While some card issuers limit how many welcome bonuses you can earn from them over time, it’s feasible to earn them regularly if you spread them out. Ideally, you’ll earn a few thousand dollars in rewards in welcome bonuses each year on top of the points and miles you earn with regular credit card spending.
- Get your spouse in the game: Remember that both you and your spouse or partner can earn the welcome bonus on the same rewards or travel credit cards — even if you live at the same address.
- Look for ways to earn more points on everything you spend: Also keep your eye out for other ways to earn more rewards whether that includes shopping portals, dining clubs or special promotions. Finally, use you could use your rewards credit card for all your regular expenses and bills to earn more points and miles over time.