Credit Card Rewards: How Do They Work?

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Each time you make a purchase using a credit card, you could have the chance to earn points, miles or cash back. Depending on your spending habits, all three can be useful, albeit in different ways. For example, you can use miles to book a flight for free or at a discounted rate. On the other hand, you can redeem cash back for a statement credit or credit toward online purchases. Take a deeper look into how various credit card rewards work to determine which type of reward system is best for you.

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Types of Credit Card Rewards

Cash back, travel miles and points are the three main types of credit card rewards. Credit cards might accrue rewards with one or more types of rewards.

Cash Back

Cashback rewards allow you to earn a percentage of each purchase in cash back for every billing cycle. These rewards then accrue in your cash-back balance. Different spending categories may have different cash-back earning rates, but often those categories include common purchases like gas, groceries and certain online purchases. You can typically redeem cash-back rewards as online purchase credits, statement credits or gift cards.

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Travel Miles

Travel miles are rewards you may earn by using a branded airline or travel credit card. These cards will often reward you with travel miles for making purchases related to travel. They might pair with an airline loyalty program which often offers additional perks for members of the program. Those who frequently fly with a certain airline often find these rewards invaluable.

Points

Rewards points are a type of credit card reward that may be more versatile than other types of rewards. You may find that you aren’t limited to one type of redemption with reward points. Instead, you might be able to redeem them for travel, statement credits or gift cards. Some points credit cards are meant for travel, while others are more general. You can generally earn credit card points on dining, gas, groceries and more of the most common spending categories.

Ways To Earn Credit Card Rewards

There are many ways to earn credit card rewards, which may vary by card. However, these are some of the most common ways.

Daily Spending

Rewards credit cards allow you to earn rewards every time you use your credit card. Typically, you should see rewards from daily spending within about 10 business days. However, it can sometimes take up to two billing cycles for them to appear in your account.

Sign-Up Bonuses

Rewards credit cards often give cardholders a bonus they can earn after opening the card. To receive the bonus, you usually must spend a certain amount of money within a given time frame. For example, a credit card might require you to spend $3,000 on the card within three months of opening. You’ll receive the sign-up bonus if you reach the minimum spending threshold within the given time frame.

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Bonus Categories

Credit card rewards allow you to earn on every purchase; the standard rate is typically 1%. However, many rewards credit cards have bonus categories that let you earn more. Depending on the card, the rate can be 5% or more on certain categories. Some credit cards have rotating bonus categories that change quarterly. If you have a credit card with bonus categories, you may have to activate them each quarter.

Referrals

Some rewards credit cards will grant you a bonus for referring people you know to sign up for the card you have. The card issuer gives you a unique referral link, which your friend or family member can use to sign up for the credit card. If they apply and approve, you may receive a referral bonus.

Which Type of Credit Card Reward Is the Best?

The best kind of credit card reward depends on what you hope to gain with your rewards. For instance, a travel rewards credit card can be a great choice if you travel by plane every month. You can often pair them with airline loyalty programs for perks like seat upgrades and free checked bags.

But you may not find travel miles very useful if you never fly. In that case, you might prefer a cash-back credit card that lets you earn statement credits or gift cards. Travel rewards credit cards are often premium cards with high annual fees. But cash-back credit cards often have a low annual fee; many have no fee at all. A cash-back credit card or points card can be the right choice if you only want a simple credit card with minimal fees.

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About the Author

Bob Haegele is a personal finance writer who specializes in topics such as investing, banking and credit cards. He left his day job in 2019 to pursue his passion for helping people get out of debt and build wealth. You can find his work at outlets such as Business Insider, Forbes Advisor and SoFi.
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