You’ve probably heard stories about people using credit card rewards programs to book free travel, cover their holiday shopping, or snag gift cards to their favorite restaurants. Contrary to popular belief, it doesn’t require a master’s degree in rewards to take advantage of your credit card1.
Ready to make the most of your rewards program? Find out how rewards cards work, different options to choose from, and how to efficiently redeem your perks.
How credit card rewards work
Whenever you make a purchase using a rewards credit card, you earn cash back, points, or miles, depending on the type of program you’re enrolled in. As you accumulate points, you can redeem them for eligible rewards, which may include statement credits, gift cards, or travel reservations.
This type of credit card is ideal for people who pay off their balances in full each month. Otherwise, you may end up accruing excessive interest charges that end up offsetting the rewards you accumulate. Even worse, you could end up paying more for the points or miles than they’re actually worth.
Why credit card rewards matter
When used responsibly, credit card rewards can cover the cost of purchases you would have made anyway. But remember that it works best when you can pay your full balance at the end of each month. Spending extra just to earn points is a major financial mistake. Instead, consider using a rewards card for everyday purchases within your usual budget that you then pay off from your checking account when your statement comes in.
One common myth around credit card rewards is that they’re a trap to keep you in debt. Another myth is that they’re only useful for people who have time to figure them out. But the truth is you can make your money work for you without the stress of debt or deciphering any hacks. By using your card responsibly and staying on top of your monthly payments, you can watch your rewards balance grow automatically. It’s a straightforward way to take control of your finances.
Different types of rewards programs
Before you start to explore rewards credit cards, take a look at different programs and how they work.
- Cash back rewards: Earn a statement credit or deposit based on a percentage of your credit card purchases.
- Points rewards: Accrue points for each dollar spent with your card, which can then be used to buy gift cards or other purchases.
- Travel rewards: Use your points to get airline miles, hotel nights, or travel upgrades.
In addition to what you earn, there are different ways of how you earn with your credit card.
- Flat rates: Earn a set number of points for each dollar you spend on your card.
- Tiered earnings: Earn different levels of points or cash back depending on the spending category (gas and groceries, for instance, may have a higher points rate).
- Rotating categories: Earn different amounts based on bonus categories that change throughout the year, usually on a quarterly basis.
The “devaluation” trap
While it can be exciting to log into your rewards platform and see a ton of points, hanging onto them for too long can actually be a bad financial move. There are a couple of reasons why.
For starters, your points are likely to lose value over time. The redemption requirements may increase, forcing you to use more points to book the same flight or hotel room. Additionally, travel partnerships may change, which can hurt your bottom line if you prefer a specific travel brand or use your points in conjunction with a loyalty program.
Even cash rewards can lose value due to inflation. If the overall cost of living increases by 3% each year, your cash back is basically worth 3% less because your purchasing power is reduced.
Choosing your credit card rewards plan
Before you pick a new credit card, take some time to match a reward system to your lifestyle.
A flat-rate cash back program is a good one-size-fits-all option, especially for everyday spending. If you spend more on groceries or restaurants, look for a card that has a higher rewards rate for those categories.
Travel rewards are ideal for frequent travelers. Your points can help fund future trips and many credit cards offer bonus points if you book through their travel platform.
In addition to comparing benefits, keep an eye out for cost differences as well. Here are some fees you may see and that vary among credit card companies.
- Interest rate
- Annual fee
- Cash advance fee
- Late payment fee
- Balance transfer fee
Bottom line
Upleveling your credit card to include a rewards program allows you to earn more without changing your financial habits. When you shop for the right card and pay off your balance each month, you’ll start to enjoy the extra perks you get, whether in the form of free purchases, travel, or cash back.
1The Prosper® Card is an unsecured credit card issued by Coastal Community Bank, Member FDIC, pursuant to license by Mastercard® International.
Written by Lauren Ward
Lauren Ward is a personal finance writer who is passionate about helping people simplify their financial decisions. Her work has been featured in outlets such as USA Today Blueprint, CNN Underscored, and many more. She lives in Virginia with her husband and three children.