How credit card rewards work

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Money in, rewards out?

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Credit card rewards can help you earn cash back on groceries, points to use on future purchases, or miles for your next flight. But all rewards programs aren’t created equal. The same number of points might be worth twice as much in one program as another, while a card with a generous reward rate isn’t always the best choice if you don’t use the rewards or if it comes with a high annual fee. Then there’s interest. If you carry a balance, interest charges can easily outweigh the rewards you receive.

Before signing up for a rewards credit card, evaluate whether a points program fits your financial habits and goals. The right card for you is one that fits the way you spend money and earns rewards you’ll actually use.

Credit card rewards programs are designed to encourage you to spend using a specific card. Issuers offer you something in return for making eligible purchases using their credit cards. When you spend money, you receive points or a percentage of your purchase as cash back. The formula is typically simple:

Eligible purchase × rewards rate="rewards" earned

For example, if your card earns 2% cash back and you spend $500 on qualifying purchases, you receive $10 in cash back. If another card earns 2 points for each dollar spent on the same purchase, you receive 1,000 points. The actual value of those points depends on how and where you redeem them.

Some cards offer the same rewards rate on every purchase, while others offer higher rewards on specific types of purchases, such as dining, groceries, entertainment, gas, or travel.

There are three main types of credit card rewards programs.

You receive a percentage of your purchase as cash back, typically as a statement credit, direct deposit, or check. Cash back often appeals to those who want simplicity and flexibility or don’t travel enough to maximize travel rewards.

Instead of getting cash back, you earn points for each dollar spent on eligible purchases. You then use a special portal to redeem those points for available rewards, such as gift cards, travel, merchandise, online purchases, loyalty program transfers, or statement credit. Some points cards are affiliated with hotel chains and can be redeemed for hotel stays.

Some credit card rewards programs are linked to an airline’s loyalty program, allowing you to earn miles from purchases and qualifying travel. Miles are generally redeemed for flights, seat upgrades, partner airline travel, or other travel-related purchases, such as in-flight meals or additional checked bags. Points and airline miles typically don’t have a fixed dollar value; their value depends on the redemption offers you select.

Each eligible purchase earns rewards based on the card’s reward rate. Cards may offer the same rewards rate on every eligible purchase, or use tiered rewards that vary by the type of purchase. For example, a tiered rewards card might earn 3% cash back on groceries and dining, 2% on gas, and 1% on everything else. Credit card issuers may also rotate bonus categories throughout the year.

Points programs work much the same way. A travel rewards card, for example, might award 5 points for every dollar spent on travel booked through the card issuer’s portal, and fewer points for other eligible purchases.

Unlike cash back, points and miles typically don’t have a fixed redemption value. The same point or mile may be worth more in one redemption offer than another.

Depending on the program, 10,000 points might be worth $100 as a statement credit, $80 toward merchandise, or $125 toward travel booked through the card issuer’s portal. You can estimate the redemption value of points or miles by dividing the dollar value of the reward by the number of points or miles required. For instance, a round-trip flight might require 40,000 miles on one date but 50,000 miles on another, even if the cash price is similar.

Credit card rewards programs work best when you understand how rewards are earned, redeemed, and reduced by fees or interest charges. Compare reward rates, redemption options, annual fees, and other program terms when evaluating rewards. Then use the card for purchases you already planned to make and pay your balance in full whenever possible.