Rewards credit cards come in three types: cash back, points and miles. Each card comes with different rewards you could earn and differing structures, and knowing how to maximize your earning potential could bring a lot of value to your wallet.
Here’s what you need to know about the types of credit card rewards, how rewards credit cards work and how you can maximize your rewards-earning potential.
What is a rewards credit card?
Rewards credit cards offer either cash back, points or miles for eligible purchases. Your rewards are calculated based on the rate per dollar spent. For example:
- Many rewards cards earn a flat rate—a fixed amount or percentage back on each purchase.
- Other cards earn elevated rates on purchases in certain categories (called tiers).
- A certain type of cash back card involves rotating bonus categories, in which a set of higher-earning categories changes every quarter and you must activate them.
- A few cards use a combination of flat-rate, tiered categories and/or rotating bonus categories.
When it comes to choosing the right card for you, you’ll need to evaluate the issuer’s rewards program, your spending habits and the overall structure of the card. If the card you choose doesn’t match your spending habits or lifestyle, you risk missing out on opportunities to earn rewards and get maximum value.
Types of credit card rewards programs
There are three types of rewards credit cards available: cash back, points and miles. Each one is tailored to a certain kind of spending. Likewise, the different types of credit card rewards programs offer different ways of redeeming rewards for specific purposes. With so many variations of cards and programs, it’s important to be familiar with the subject matter before you start shopping for a card.
Cash back proves a simple way to get rewarded for making purchases with your card. You’ll earn a percentage of cash back on eligible purchases that you make with the card. The rewards programs include tiered, flat-rate and rotating bonus categories.
However, some cards offer combinations of structures, like the Chase Freedom Unlimited®, which earns 5 percent on travel purchased through Chase, 3 percent at restaurants and drugstores, and an unlimited 1.5 percent on all other purchases.
Points cards typically reward borrowers with a fixed amount of points per $1 dollar spent and 1:1 redemption conversion. Every issuer has different rewards rates and conversion rates, as well as different redemption options.
For example, the Chase Sapphire Preferred® Card earns 2X points per dollar on travel and dining and 1X point per dollar on all other purchases. Options for redeeming Chase Ultimate Rewards® points include travel, cash back, statement credits, gift cards and merchandise.
Travel credit cards—also known as miles cards—allow you to redeem your rewards for travel-related items and perks, like airline tickets, hotel stays and airport lounge access. These cards earn miles for every dollar that you spend on eligible purchases, which typically focus on travel expenses but might include purchases not directly related to travel.
The Discover it® Miles is a good example of a flat-rate travel card, as you can earn an unlimited 1.5X miles for every dollar you spend on all purchases.
How cash back rewards programs work
When you make an eligible purchase with a cash back credit card, you’ll receive a percentage of cash back. You can earn cash back at different rates and in different categories, depending on the card.
The redemption process is typically quite simple. Your issuer should have a redemption portal on their website that offers different ways to redeem. The most common options include statement credits, direct deposits to a bank account, merchandise and gift cards. Some issuers also allow charitable donations.
Before redeeming, check with your issuer to make sure you’re aware of the rules on cash back redemption and that you’re getting the best value (typically statement credits or direct deposits).
How points rewards programs work
Credit card point systems operate a bit differently from cash back because each point you earn is tied to a specific dollar amount rather than a percentage. With a 1:1 ratio, you’ll earn one point per $1 dollar you spend. Points have more flexible redemption options—you can redeem them or things like merchandise, cash back, gift cards, travel purchases, or even concerts and sporting events.
When it comes to redeeming your points, typically the issuer will have an online portal on their website that lists redemption options and values. Remember to be strategic when redeeming and choose the option that gives you the most bang for your buck.
How travel and miles programs work
Credit card miles work in a way similar to points but are associated mainly with travel cards. As with points cards, you’ll earn a fixed amount of miles for every dollar you spend, although the rate could be higher in some purchase categories.
If you’re using your miles to book a flight, you can typically redeem them by logging into your account during the booking process—and the same goes for booking a hotel. Some travel cards offer the option of letting you transfer miles to the issuer’s travel partners, which usually include airlines and hotels.
How to choose a rewards credit card
When it comes to choosing your rewards card, you’ll need to decide whether the type of credit card rewards program it offers matches up with your goals and spending habits. Consider the following situations:
- If you primarily use your credit card for everyday purchases like gas and groceries, without a large concentration of spending in any particular category, a flat-rate cash back card would be your best bet. A tiered or rotating bonus category card could yield greater earnings but will probably involve targeted spending on your part.
- A travel card lends itself to those who would like rewards to offset some of the costs of their frequent trips. Your options include general travel cards or co-branded cards that reward you for loyalty to a particular airline or hotel brand.
- A points card could provide you with flexible redemption options that you can apply to travel purchases or redeem as cash back. With this type of card, you’ll probably need to pay attention to variations in value among your redemption options.
It’s also important that you research interest rates, annual fees and sign-up bonuses. All these factors can affect the card’s overall value and determine how much the rewards you earn will be worth.