What Are Credit Card Rewards Programs, and How Can You Best Use Them?

FT Contributor
A person types on a laptop while holding a credit card.

If you’re like most American consumers, you receive a barrage of offers from credit card companies in the mail and in your email inbox. Many of these companies extol their rewards programs as a major selling point, but that doesn’t mean their card is necessarily right for you.

As a consumer, it’s important to compare a credit card’s rewards program with others to make sense of what they’re offering and determine which rewards program is right for you and your lifestyle.

While this might seem overwhelming, this guide will help you find the rewards card that is right for you. If you’re new to the world of credit cards, here you’ll gain a better understanding of the many credit card rewards programs that are available, as well as the best ways to use them.

Table of Contents

What Is a Rewards Credit Card?

A rewards card is a credit card that offers a bonus to consumers as an incentive for using the card. In most cases, rewards come in the form of cashback, discounts on specific products or services, or frequent flyer miles.

Banks offer these kinds of credit cards to entice consumers to sign up for their services, encourage their existing customers to use their cards, or to get more people to do any one thing, whether it be to shop at a particular retailer or encourage the purchase of a particular service.

Types of Reward Credit Cards

  1. Cashback credit cards:
    Reward you with cash as a check or a direct deposit; some programs require that the “cash” you receive be used as a credit towards your account. Some credit cards will even allow you to put the cash you have earned towards your balance. In other cases, cashback comes in the form of points, which can be redeemed for merchandise or gift cards, often at a discounted rate. If you sign up for a credit card that uses a points-based rewards system, the value of each point may differ. For example, points might be rewarded for specific purchases or on a per-dollar basis.
  2. Travel credit cards:
    Many hotels and airlines offer credit cards with travel rewards programs. This allows you to earn rewards that can be redeemed for travel costs such as airline tickets, hotel rooms, and even free trips. Each travel card will have its own way of earning benefits. For example, a frequent flyer card that allows you to earn miles will vary depending on how the program is structured. You may be able to earn a mile for every dollar that you spend, in some cases.
  3. Store credit cards:
    Also known as retail credit cards, a store credit card rewards program might offer a percentage discount on each purchase, a cashback program, or both. Often, retailers will also offer their credit cardholders a gift for their birthday or coupons for special events throughout the year, enticing them to come in and shop.
  4. Gas credit cards:
    These credit cards are typically issued by a gas station, allowing you to take advantage of discounted fuel and other perks that are part of their rewards program, such as cashback to be used on future purchases.

Examples of Rewards Cards

  1. Chase Freedom Unlimited:
    If you’re looking for a card that doesn’t limit how you earn rewards, this card allows you to earn 1.5% cashback on each purchase that you make. It’s a great card for those looking to earn rewards with ease. If you spend $500 in the first three months of opening the card, you can earn an additional $150 cashback. With no annual fee, this card is an excellent option for new credit card users that allows you to see the value right away.
  2. Citi Double Cash Card:
    This card allows you to earn 2% back on each purchase that you make — 1% when you make the purchase and an additional 1% when you pay your bill. Citi recently gave users the ability to convert their rewards to “ThankYou points,” which are valued at a higher rate. Essentially, this allows credit cardholders to earn even more points with no annual fee.

What Are Credit Card Points?

Credit card points are the rewards that credit cardholders earn by using their cards. In most cases, rewards are referred to as points, but they can also be called miles or cashback. Each credit card company puts a different value on the points that they offer.

How Credit Card Points Can Be Used

How your credit card points are used will depend on the terms and conditions of the specific card you sign up for, but most are very versatile. Many times, credit card users don’t take advantage of their rewards. Knowing the many ways you can do so will allow you to take full advantage of your rewards credit card:

  • Obtain cashback: Many credit card companies allow customers to use their points as they would cash on other purchases or to pay off their account balance.
  • Redeem for gift cards: Some credit card companies allow points to be exchanged for gift cards at discounted rates.
  • Donate to charity: Certain credit cards allow points to be exchanged for cash in the form of a charitable donation.
  • Get discounts on travel: Travel rewards cards allow their customers to exchange points for a discount on travel costs, including hotel bookings and airline tickets.

The Value of Credit Card Reward Points and Bonuses

As mentioned previously, the value of the reward points and bonuses you receive depends on the credit card company offering them. For example, if it takes you 1,000 points to get a $10 gift card, you can assume your points are equal to one cent each.

To determine the value of the rewards points you’re receiving, divide the dollar value of the reward you receive by the total number of points it took you to retrieve that award. While that might not equate to the dollar amount you spent to obtain those points, it will allow you to compare and contrast what you spend against what you earn.

How to Use Rewards Credit Cards Effectively

Here’s how you can get the most out of your credit cards:

  1. Avoid credit card churning: This is when you sign up for a credit card just to receive the sign-on bonus. Doing so is inadvisable, as closing your credit card too quickly can result in a loss of rewards and also hurt your credit score.
  2. Shop smart: When it comes to opening a new credit card account that offers you rewards, it’s important to make strategic purchases that will allow you to accumulate rewards quickly and with ease. Pay attention to your credit card company’s latest rewards offer to ensure you’re shopping wisely.
  3. Negotiate for more: In some cases, you may be able to negotiate with your credit card company for better rewards.

Consider your shopping habits and lifestyle before choosing a credit card rewards program that will best fit your needs.

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