Credit card rewards are the best way to get paid back for the money you already spend. If you buy things with cash, a debit card, or a basic credit card that doesn’t offer rewards, you are leaving money on the table and missing out on a lot of value.
In this post we’ll explain what credit card rewards are, how you can earn them, and what you can do with them.
What are Credit Card Rewards?
Credit card rewards come in many forms, such as points, miles, or cash back, depending on the type of card you get and the way you use it. No matter which form they take, rewards are exactly what they sound like: something of value that you get for using the card.
Depending on the type of rewards currency a given card earns, you may be able to choose how to spend your rewards (e.g. for statement credits, gift cards, or travel), or you may be locked into a specific currency (e.g. points or miles with a specific hotel or airline company).
While both types of cards have their own benefits and drawbacks, we will focus our attention primarily on the more flexible rewards cards, since these are most broadly applicable for the largest number of people.
How do I earn Credit Card Rewards?
The main way to earn credit card rewards is to get one or more rewards credit cards, and then use them to make purchases. Most rewards cards will have a base rate (e.g. 1%, 1.5%, or 2%) that they pay you on all purchases, and some will also have bonus (or accelerator) rates that they pay only on specific categories (e.g. 2% on dining, 3% groceries, or 4% on gas).
If you’re just starting out with rewards cards, we would recommend choosing a simple flat rate card for your first rewards card. A few good examples would be the Double Cash Card from Citi, or the Active Cash Card from Wells Fargo. Both of these cards pay you 2% back on all your purchases, so you can just use them for everything without worrying about things like merchant type or spending category.
If you’d like to earn 3% or more on some or all of your spending, you’ll want to consider adding some other more specialized cards to your wallet. There are some great options out there that will pay you up to 5% or more on major purchase categories. For example, Amazon, Target, and Walmart all offer credit cards that pay 5% back on all purchases you make at their stores & thru their websites. Since these giant retailers sell a broad range of products, you can use them to get 5% back on groceries, clothes, home goods, and many others.
No matter which card or cards you choose, all you need to do to earn rewards on most cards is get the card and use it for your purchases. This can also help you earn sign-up bonuses on cards that offer them. Sign-up bonuses are a great way to quickly earn a large chunk of rewards, and typically require you to spend a certain amount on your new card within a few months of opening the account. For example, the Active Cash card mentioned above currently offers a $200 bonus if you spend $1,000 on the card within the first 3 months of getting it.
What can I get with my credit card rewards?
How you choose to spend your rewards is entirely up to you, but you will be limited by the redemption options offered by the issuer of the card. However, most issuers offer several options, and these options are fairly consistent across issuers, so we’ll look at some of the most common ones below
Cash Back
Probably the most common (and easy to understand) way to use your rewards is to trade them in for cash back. Most cards will give you a cash value of 1 cent per point, or $1.00 per 100 points, when redeemed for cash. This can typically be deposited into your bank account or sent to you as a paper check, although some issuers have now gone paperless and will only offer cash back in the form of a direct deposit.
Statement Credit
Statement credits are very similar to cash back (and usually also offer a value of $1.00 per 100 points) but are applied directly to your statement rather than deposited into an external account. Choosing to redeem for a statement credit will reduce the amount you owe on your statement, so instead of having e.g. an extra $200 in your checking account, you’ll owe $200 less on your credit card bill.
Gift Cards
Many credit card issuers partner with gift card companies to offer gift cards to their rewards customers. Gift cards tend to offer similar value to cash back and statement credit redemptions, but can in some cases be a better deal. For example, Discover offers most of the gift cards they feature at a 20% discount, so you’d only need to spend $80 worth of rewards points to get a $100 gift card.
Since cash is more versatile than a gift card, we would not recommend opting for gift cards unless a) they offer better value than cash and b) you can get them for merchants you are absolutely certain you will be spending money at in the near future. Otherwise, they may just sit in a drawer and be forgotten, or you’ll spend some but not all of the money on the gift card. In both cases, you’ll be giving up some of the value you could have gotten if you’d opted for a different type of reward.
Travel
Travel is another common rewards redemption category, and can in many cases offer better value than cash back. The specific value you can get from travel redemptions varies by issuer as well as by card (and in some cases even by travel type), and will typically require you to book your trip through the issuer’s travel portal. If you plan to travel for business or pleasure, and you have a card that offers a travel redemption option, it’s worth looking into whether you can use your rewards to book your trip. It’s a good option to save on out-of-pocket costs, especially if you can get better than 100 points per $1.00.
Transfer to Partner Programs
Point Transfer, or Point Conversion, is a less well-known but still relatively common way to use your points. Partner transfer options will vary by card issuer and are generally limited to airline and hotel programs, but this can be a great option for getting extra value out of your points, as long as you are a member of the partner’s loyalty program and you understand how to use your points in that program to book your trip. One note here: this option is primarily available on cards that have an annual fee, so it may not be available to you if you have a no-fee card with a given issuer.
No matter how you choose to use your rewards, you should keep in mind that each time you do, you are getting something of value that you would not have gotten if you had not used your card for your purchases in the first place. And this is the best thing about credit card rewards: you are getting something for free, just for doing the things you already do and buying the things you already buy.
For more details about how to get the best value from your rewards cards, and an in-depth look at the benefits and drawbacks of the different options available across card issuers, check out our posts on Maximizing Credit Card Rewards and Maximizing Card Reward Redemptions.