Credit Card Rewards Guide: The Basics, Pitfalls & Tips to Maximize Earnings
Rewards are awesome. In addition to convenience, they’re one of the main draws of credit card use. That’s especially true these days, as new regulations have pushed debit card rewards to the brink of extinction while credit card issuers have stepped up their game in pursuit of customers at the upper end of the credit spectrum.
People with excellent credit can now expect initial rewards bonuses worth hundreds of dollars as well as generous ongoing earning rates in popular spending categories, like gas, groceries, travel, dining, and more. But you don’t need superb credit just to earn worthwhile rewards. Credit cards provide rewards to people across the credit score spectrum, as a matter of fact.
You just need to know your way around the rewards landscape if you’re going to subsidize your spending as efficiently as possible. Most people gravitate to travel rewards, for example, when they are often better served by an everyday cash back card or a card with a low interest rate. There are a number of different pitfalls that could derail your credit card strategy. Hopefully, the information below will help you avoid them and ultimately reap full potential from your plastic.
Types of Rewards Currencies
Credit card rewards come in three basic currencies: cash back, miles, and points. We break down the relative benefits of each below.
Cash Back: Cash back is undoubtedly the most straightforward type of rewards. With a cash back credit card, a certain percentage of your purchases will be returned to you. The most common way to redeem earned cash back is for a statement credit, although some issues will give you the option of receiving a check in the mail as well.
One percent cash back across all purchases has become the industry standard. Many credit cards offer 1% as a base earning rate that is supplemented by higher earning rates in specific spending categories. Unlike points or miles, cash back rewards cannot be devalued by credit card companies.
Miles: There are two types of credit card miles: those tied to a specific airline, and generic miles that can be put toward any travel-related expense.
The former are offered by co-branded credit cards and are best for brand-loyal frequent travelers. The latter are great for people who travel often enough to make use of travel-oriented rewards, but don’t want to be tied down to a particular travel provider.
Points: There also are two types of credit card points: hotel points and generic points that are primarily redeemable toward merchandise. You should only opt for points-based credit card rewards if you are sure that you’ll be able to redeem often enough to benefit consistently, avoid devaluation, and maximize value.
Earning Rewards: Program Structure & Strategy
Much like rewards are offered in different currencies, they are also doled out to consumers for different reasons.
Initial Bonuses: It has become vogue for credit card companies to offer well-qualified new customers what amount to signing bonuses. More specifically, they’ll give you a lump-sum rewards bounty – 40,000 miles for example – after you make your first purchase or as a result of spending a specified amount during the first few months that your account is open.
Taking advantage of an attractive initial bonus is a great way to supplement another card’s ongoing earning rate.
Spending-Based Rewards: The most common way to earn rewards is by making purchases with your credit card. You should strive to get a card that offers attractive earning rates in your biggest expense categories. In most cases, no rewards are given for cash advances, balance transfers, or the use of checks provided by your credit card company.
Anniversary Bonuses: Some credit cards will even give you a free flight, hotel night, or a certain amount of points, miles or cash back each year on your account anniversary. This is often done to justify an annual fee, and you have to make sure the juice is worth the squeeze before agreeing to re-up.
Editor’s Tip – How to Maximize Your Credit Card Rewards:
If you have above-average credit, find the card that offers the highest cash back earning rates in your biggest recurring spending categories and make it your primary spending vehicle. Then, every once in a while, supplement your rewards with a card that offers a lucrative initial bonus (preferably cash-based as well). For example, you might use a great everyday cash back rewards card as your centerpiece, and then, just to fill your coffers a bit, decide to apply for a card offering a $400 initial bonus in return for spending $3,000 during the first three months.
If you have limited or damaged credit, your best course of action is to open a credit card with no annual fee in order to get positive information flowing into your major credit reports. If you can score some rewards in addition to that, great, but don’t make it your priority at this point.
Redeeming Rewards: Value & Versatility
Most credit cards enable you to redeem the rewards that you earn in certain denominations (e.g. multiples of $25 cash back, or enough miles for a flight). You will also generally be presented with a few different options in terms of how you can redeem your rewards as well.
Your goal should be to redeem your rewards in a way that gets the biggest bang for your buck. This is a moot point for cash back cards, as your rewards are already in the form of dollars, but on miles and points-based credit cards it is crucial. Credit card companies will try to push you toward less lucrative redemption methods, which means you should know how to calculate the dollar-value of any non-cash redemption option before using it. For example, with 10,000 points you may be able to get $50 cash back, a $75 gift card, a flight that normally costs $200, etc. By comparing your options in this manner, it will become abundantly clear which one will provide the best return on investment.
Check: You can generally request that your rewards balance be cashed out and mailed to you via check.
Statement Credit: Perhaps the simplest way to redeem rewards is via statement credit. This involves crediting your rewards balance to your account and therefore serves to help you pay your bill.
Gift Cards: More and more issuers are offering gift card redemption through their online shopping malls Redeeming for a gift card from one of your favorite retailers is often better than redeeming your rewards directly for merchandise through a credit card shopping mall, which tends to be a poor value proposition.
Merchandise: You can often buy consumer goods – ranging from sporting equipment to electronics – in credit card shopping malls as well. Credit card companies often put a dollar figure (or a discount percentage) next to each item in their online shopping store, to make it look like you’re getting a good deal. However, that dollar figure is still likely higher than what you’re going to find at Amazon, for example.
Charity: Unbeknownst to most consumers, many credit cards allow you to redeem your rewards for a charitable donation with the click of a mouse. If your credit card company offers no such option, or you’d rather donate to an organization other than the one(s) affiliated with your issuer, you can always redeem for cash or a gift card and give back that way.
Special Experiences: Membership in certain high-end rewards programs enables customers to qualify for certain “unique experiences.” This might entail, for example, exclusive access to event tickets, celebrity meet-and-greets, etc.
FAQ: Picking a Rewards Credit Card
The most important question to ask yourself when approaching the search for a rewards credit card is: Do you really need one? While much depends on your credit standing as well as your spending and payment habits, there are a few reliable rules of thumb that you can follow.
For example, it’s pretty obvious that you should focus on rewards if you have good/excellent credit and you pay your bill in full every month. If that is the case, you don’t need a low interest rate because you aren’t financing anything, after all, and it might even be worth paying an annual fee if the perks are lucrative enough. For such folks, the main challenge will be finding a card that complements their spending habits well (see Q&A below).
On the other hand, you generally shouldn’t focus on rewards if you have average to below-average credit OR you carry credit card debt from month to month. Folks who lack the credit standing (including students) are better off finding a no annual fee credit card since credit building at the lowest possible cost should be their top priority. Obviously, finding a no annual fee rewards card would be ideal. People who are either carrying credit card debt or planning a big-ticket purchase that they’ll need a few months to pay off should look for a 0% credit card with no annual fee.
For more information about choosing a rewards card, including advice regarding travel rewards, check out the FAQ section below.
- Why can’t I get approved for a rewards card?
- Who offers the best travel rewards?
- Which rewards credit cards have a low interest rate?
- Which card has the best initial bonus?
A. Attractive rewards credit cards may have more stringent underwriting requirements than some of their counterparts due to the value of their perks. If you don’t get approved for your card of choice and you believe that your credit standing and disposable income meet the card’s requirements, you may want to check your free credit reports for signs of credit damage or even submit a reconsideration request.
A. This is perhaps the most common question that we get from new credit card users. The allure of a free vacation is just that strong, and credit cards have become synonymous with such perks. But while everyone wants travel rewards, not everyone will benefit from them.
With that said, you should only opt for travel rewards if you will realistically be able to redeem what you earn for a free vacation within 12-18 months. Otherwise, you’ll be at risk of devaluation and you won’t be benefitting enough to make your rewards card as worthwhile as it could be.
Check out WalletHub’s Rewards Credit Card page to view and compare the latest offers.
A. This question is indicative of a flawed approach. Credit cards tend to offer either great rewards or a low interest rate, but not both. That means taking both into account when choosing a single credit card will naturally leave you with mediocre terms across the board.
As a result, you should isolate your debt on a 0% credit card, while using a rewards card for everyday expenses that you pay off in full within the billing cycle. This will enable you to get the best possible financing terms as well as the most lucrative rewards for your spending habits.
A. A number of different credit cards offer initial rewards bonuses. The key thing is here is to gravitate not to the cards with the absolute biggest initial bonuses, but rather attractive initial bonuses that you can actually use.
For example, many WalletHub readers applied for the British Airways Card back when it was advertising 100,000 free miles, redeemable for 2 free round-trip flights to Europe. However, when they went to redeem those miles, they found themselves plagued by blackout dates and other restrictions that made the miles significantly less valuable.
Cash is therefore usually the best option because it affords you more redemption flexibility than airline miles or hotel points. Plus, cash makes it easier to determine how much the bonus is worth before you submit an application.
With that said, WalletHub maintains a database of more than 1,000 different credit card offers and displays the best available initial bonuses on the Best Credit Card Deals page. You can even sign up for an alert when a new offer comes available.
What to Watch Out For: Common Pitfalls & Complaints
Credit card rewards programs aren’t always as straightforward as we’d like. Sure, things aren’t as bad as before the CARD Act, when bait-and-switch pricing was commonplace and transparency was conspicuously absent from the market. However, there still are a number of caveats and pitfalls that come with rewards card use, and you’d better know how to navigate this minefield if you want your plastic to really pay off.
Earning Limits: It’s common for rewards programs to implement monthly, quarterly, or annual earning limits – either in certain spending categories or across the board. This enables issuers to control their profit margins by applying a ceiling to the value that you extract from their products.
Oftentimes, earning limits will have no practical effect on your situation. That would be the case if a credit card offers 6% cash back on supermarket purchases up to $6,000 annually and you only spend $3,000 at the grocery story each year, for instance. But in other cases, earning limits may prevent you from accruing rewards late in a given billing cycle or the calendar year. You should therefore always read a program’s fine print and consider how it applies to your spending habits before signing up.
Rotating Categories: Rotating categories enable issuers to advertise a high maximum earning rate without actually paying anything close to that in practice. For example, you may have seen offers touting the ability to earn 5% cash back in popular spending categories that change on a quarterly basis. The problem is that you have to sign up for the ability to earn that rate each quarter when the updated discount categories are announced. Not only is it therefore likely that you’ll forget, but you’ll have no way of knowing how much you stand to benefit from quarter to quarter.
Redemption Versatility: What can you redeem your rewards for, and do you stand to get good value on redemption? Those are two key questions that you must ask yourself when considering a rewards credit card. A big pile of rewards might seem appealing, after all, but it’s ultimately only as good as what you can get for it. That’s especially true when it comes to travel rewards, as not all points and miles carry the same dollar value, and not all issuers work with the same airlines and hotel chains.
In fact, consumer interest in redemption versatility is driving some issuers to expand their network of corporate partners in order to give customers more options and make their rewards programs more appealing.
“The more embedded your product/service is in the overall consumption patterns of a given consumer or consumer segment, the more likely your product is to become a habitual purchase,” says Hope Jensen Schau, the Chair in Entrepreneurship and Innovation in the University of Arizona’s Eller College of Management. “The trend toward cobranding promotions and cobranded versatile rewards is likely to grow. If the partnership is well-conceived, it adds value to the consumer and inspires solidified preference and purchase decisions.”
However, these plateaus are not guaranteed to be static, and whenever an issuer increases the number of points/miles needed for redemption, the points/miles you have saved effectively become worthless all of a sudden.
In order to avoid rewards devaluation, we recommend redeeming your points/miles as frequently as possible. This will not only minimize the number of points/miles that are vulnerable to devaluation at any given time, but will also allow you to benefit from your rewards credit card more often.
To be able to redeem frequently you must, of course, open a credit card offering rewards on something you purchase frequently. Or, as mentioned above, you could just go for a cash back credit card and avoid the hassle altogether.
Rewards Expiration: While most issuers have done away with expiration dates in the face of consumer anger, certain rewards programs may still have them. That’s why it’s so important to search through the fine print of a credit card offer for mention of the word “reward” and any caveats that might be enumerated there [hint: on your keyboard hold down the CTRL and F buttons to enable your browser's text search function].
It’s also important to note that you can’t keep the rewards you’ve accrued when you close an account. So always make sure to cash out before saying goodbye.
Rewards-Based Overspending: Don’t spend more than you ordinarily would just to earn some rewards, even if the prize you’re chasing is a hefty initial bonus. This is an all-too-common pitfall.
“Appealing loyalty offers may drive actual increased consumer spending as consumers modify normal spending to take advantage of compelling offers,” Dan Horne, a professor of marketing at Providence College, recently told WalletHub in explaining the value of rewards programs to the companies that offer them.
There are essentially two types of rewards-based overspending, according to Schau. For starters, “Consumers may be inspired to purchase a given product or service earlier than anticipated to take advantage of a loyalty promotion or stockpile,” Shau says. “In rarer cases, consumers might be inspired to purchase something they would not ordinarily purchase or thought they could not afford based on a loyalty program.”
Either way, there’s no sense in adding to the billions of dollars that we collectively owe to credit card companies just to score a few miles or a bit of cash back. Rewards only benefit you if they’re used to subsidize ordinary spending habits.
Credit Card Rewards Statistics
WalletHub conducts quarterly analysis of the credit card landscape, including rewards earning rates for different credit segments and types of cards. This information will give you a sense of what to expect from a rewards card and can serve as a useful point of reference when you’re comparison shopping.
It will also help you spot trends. For example, the chart below displays how credit card companies ramped up their average initial bonus in the wake of the Great Recession, as they competed for the business of those stable customers who made it through the turmoil with excellent credit intact.
Initial Bonus Points/Miles
Ask The Experts: The Value of Rewards Programs
- How do loyalty programs affect consumer spending habits?
- How do you see the trend of companies establishing versatile rewards partnerships with other businesses playing out over the next few years?
- How do companies go about selecting their rewards partnerships?
- How do companies use loyalty programs differently for customer acquisition vs. customer retention?
- How are credit card-based loyalty programs different from others?
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