Types of rewards credit cards and how they work

Many Americans bank on rewards credit cards. A 2021 survey by shopping platform Slickdeals found the average credit cardholder reaps $757 in rewards in a year — on everything from cash back to airline flights and hotel stays, concerts and dining.

Yet the cardholder who takes advantage of travel rewards to cover airfare or hotel stays might rely on a different credit card than the cardholder who covets cash back.

Rewards credit cards break down into three general groups: cash back, points and miles. While there’s overlap in how each of these work, it’s important to know the difference so you can find the cards — and rewards — that work best for you.

Cash back

Cash back credit cards offer an easy-to-navigate path toward rewards. Perhaps that’s why they’re so popular. Essentially, a cash back card supplies a cash rebate based on the purchases you make. The rate for earning cash back rewards typically is shown as a percentage. The percentage may be a flat rate or the card might offer what’s known as tiered rewards.

A flat-rate rewards card will give you the same cash back rate on every purchase. Choose a card that offers at least 1.5 percent cash back on purchases, although you can get up to 2 percent cash rewards with some cards, like the Wells Fargo Active Cash® Card and Citi® Double Cash Card (1 percent when you make the purchase, and another 1 percent when you pay it off).

Tiered rewards, on the other hand, can be more lucrative, but the cash back varies depending on the spending category. These cards require a little more work to get the most out of your rewards. They usually work best as part of a multi-card strategy, in which you use a card (or two) with a higher rewards rate for your biggest spending category, such as groceries or dining out, and then a flat-rate card for everything else. Two well-known and lucrative bonus category cash back cards are the Chase Freedom Unlimited and Blue Cash Preferred® Card from American Express.

Another wrinkle when it comes to rewards: cash back cards with rotating reward categories. These cards offer higher rewards rates on different categories each quarter. You’ll need to activate these categories ahead of time in order to earn the higher rate, otherwise you’ll just earn the base rate, which is usually 1 percent. There’s generally also a cap on spending in each category. A typical rewards rate for a rotating category card is 5 percent cash back on bonus categories, and some also offer additional fixed-rate rewards categories. Popular rotating rewards cards include the Discover it® Cash Back and Chase Freedom Flex℠.

Pros of cash back cards

• Most cash back cards have no annual fee.
• Flexible redemption options mean you can often receive cash back in the form of a statement credit, check or direct deposit.
• You can easily navigate uncomplicated rewards programs.

Cons of cash back cards

• Most cash back cards are thin on travel benefits.
• Some cards place a cap on annual, or even quarterly, cash back earnings.

Points

Another type of rewards credit card provides reward points rather than cash back. You earn a certain number of points for every dollar spent, such as 2X, 5X or even 10X points. Points rewards cards, like the Chase Sapphire Preferred Card and The Platinum Card® from American Express, can be particularly lucrative, but tend to charge (sometimes quite hefty) annual fees.

Point values fluctuate according to the kind of transaction involved. Some credit cards offer a fixed number of points for each purchase. Others change spending categories each month or quarter, delivering more points per dollar spent in some categories compared with others.

Depending on your card, you might be able to use points to book travel through your issuer’s travel portal, transfer points to a loyalty program, pay with points at checkout or redeem points for gift cards or purchases. Great for loyalists of certain hotel brands, some cards that offer rewards points are tied to certain hotel chains, like the Hilton Honors American Express Card.

Pros of cards that reward points

• Most points rewards cards come with a welcome offer or sign-up bonus.
• Points generally don’t expire.
• Many cards offer more points for travel-related expenses than other purchases, making them great for frequent travelers.
• Some cards offer the highest reward rate, and even boosted redemption value, for travel booked through the issuer portal.

Cons of cards that reward points

• Some cards charge high annual fees.
• You may need to redeem points through a card issuer’s portal.

Miles

Aside from rewards credit cards that provide cash back and points, you’ll find ones that enable you to earn miles for travel. These cards are either affiliated with an airline or are general rewards cards that enable you to collect travel miles.

Airline cards are designed to reward loyalty to a specific airline. While you can earn those miles via spending on other purchases, you can only redeem them for travel on that particular airline. Depending on who you fly with most often, you may be able to pick from a number of different cards with the same airline — Southwest offers several cards, as does United Airlines.

Other rewards cards offer “miles” that are really a form of travel points. The Capital One Venture Rewards Credit Card, for example, offers miles earned and redeemed for a variety of travel options.

Pros of cards that reward miles

• Miles earned on most travel cards don’t expire.
• Many cards provide substantial sign-up bonuses.
• Some cards may allow you to transfer miles to their travel partners.

Cons of cards that reward miles

• Some cards may charge annual fees of $500 or more.
• Miles usually have to be redeemed through issuer portals.

How to redeem rewards

There are many different ways to use the rewards you’ve earned, depending on what type of card you have.

Most credit cards that offer rewards points have a redemption portal where you can cash in your rewards. When you access the site, you’ll likely see a “Redeem Points” or “Use Miles” heading across the top. Once you navigate to that page, you’ll see there are often several different redemption options. Some may include gift cards, statement credits, travel or cash. These options vary, however, since each rewards program has its own redemption options.

Cash back rewards are typically held in your account until you redeem. This makes them highly accessible, since they are essentially cash in hand. In most cases, you can convert your cash back rewards into a statement credit, check or gift card, or even a transfer them to an eligible bank account. Depending on your card and the rewards program, you may be able to set up automatic redemptions with your cash back rewards. This will help you earn more rewards without having to manually redeem them.

If you have a hotel-branded credit card, you may have a few different ways to redeem hotel points. These might include the standard award stay using points, the option to use a combination of cash and points or set minimums to get a discount on an award stay, such as a fifth night free. You could even become eligible for an elite status using points and cash.

Many airline credit cards nowadays offer rewards points that you can use like frequent flyer miles. Additionally, some cards let you transfer points to the airline’s frequent flyer program at a high value, multiplying the points by a certain number of times to boost their value.

Which type of rewards credit card is right for you?

Generally, cash back rewards are simpler to redeem — whether by statement credit or check, cash is cash — but you can earn them in many ways, depending on the card and your own spending. Points or miles, on the other hand, are designed to maximize travel awards. Use them well and the payoff can be big.

To figure out what’s the right rewards credit card for you, consider your lifestyle and spending patterns. Do you load up your cart at the grocery store every week? If so, a cash back card that offers extra rewards for grocery shopping may be the best bet. If you stay at hotels almost as often as you stay at home, a rewards card that earns free hotel stays may be the answer. If you fly a lot, you may find a card that helps you score seat upgrades, and airport lounge access turns out to be the most rewarding of them all.

Bottom line

Rewards credit cards are a popular choice — after all, it makes sense to get rewarded for purchases you’d be making anyway. Whether you stick with straightforward cash back or decide to roll up your sleeves to get the most out of a points or miles strategy, be sure to pick a card that offers rewards on your main spending categories and comes with an easily attainable sign-up bonus to kickstart your rewards stash.