How does a reward card work?

A rewards card gives the cardholder something back for each purchase, usually a percentage of the purchase amount as cash back, miles, or points. You can sometimes earn bonus rewards by spending a certain amount in the first few months you have the card, too. You can then redeem the rewards, usually for merchandise, statement credits, gift cards or travel. Generally, your rewards will be available to use after you see them tallied up on your online account or monthly statement.

There are 3 kinds of rewards credit cards, and each is valuable to a certain type of lifestyle. But most rewards cards give at least one rewards unit per $1 spent. That can add up to 1% back or more, depending on the redemption method and credit card.

Cash back credit cards give a percentage of your purchases back to you as a statement credit, check, or bank deposit. Some cash back credit cards have set tiers for rewards - they’ll give 2% back at gas stations and 3% back at restaurants, for example. Others have rotating categories for different levels of cash back, which usually change once per quarter. The good thing about cash back is that it can’t be devalued by credit card companies, like miles or points can.

Points credit cards usually give at least 1 point per $1 spent. Typically, you can expect to redeem points for travel, merchandise, cash back, or gift cards. Many points credit cards also allow you to redeem for a charitable donation or for tickets to special events. Hotel credit cards are usually points credit cards, too. If you stay at that particular hotel brand a lot, there are often many bonus points and loyalty perks to be earned on those credit cards.

There are a lot more redemption options with points than cash back, but that doesn’t mean all points redemptions will be equal. Points are worth more with some methods than others. Credit card companies could make each point worth 1.25 cents when redeemed for gift cards and 1 cent when redeemed for cash back, for example. This can make it hard to pin down how much a point is actually worth.

Miles credit cards are made for travelers, obviously. In fact, many airline credit cards give rewards as miles. Most credit cards that give miles will also allow you to redeem for cash back, merchandise or other things, but redeeming miles for travel will usually give you the best redemption value. Like other rewards cards, you’ll generally get one for one - one mile per $1 spent. And like credit cards that give points, you’re also subject to devaluation with miles. The card issuer can decide that all your earned miles are worth half as much as they were when you earned them.

Overall, rewards credit cards work best when you get the one that’s right for your spending habits and lifestyle. So it’s worth reading a credit card’s reward redemption terms before you apply for one. One thing to watch out for is that some rewards credit cards have thresholds for redemption, meaning you need a certain amount of reward credits saved up to redeem them. And you definitely want to redeem your rewards often, especially if you’re earning miles or points, because those units can be devalued anytime.

Rewards cards can be either credit cards or store loyalty cards. With loyalty cards, it’s not a credit card, but you present it to the cashier at the store when you make a purchase and you can earn points for your spending. A lot of rewards cards like that will give you discounts after you spend a certain amount.