When you’re searching for rewards credit cards, you see phrases like “5% cash back,” “2x points,” and “4x miles.” These phrases sound straightforward, but they’re anything but.
Some come with stipulations. For example, they may limit how much you earn to a particular category or how much you earn in that category.
And earning the points is only half the battle. You also have to redeem them, and each redemption option values your points differently. It feels like if you make one false move, you lose money.
But take a deep breath. Picking a credit card that works for you instead of costing you starts by determining the true value of the rewards you’re earning.
Why Determining Credit Card Point Value Is Important
Understanding the value of your credit card points allows you to make informed decisions about which credit cards are best for you and how to redeem your rewards for the most money. That ensures you’re maximizing the benefits you’re getting for your everyday spending.
Types of Credit Card Points
There are multiple rewards credit card categories. Each offers rewards in different ways and for different types of spending. There are three primary categories:
- Cash back. Cash-back credit cards provide a percentage of your purchases back as cash. They usually credit your account with your cash-back balance. You can then redeem them as statement credits, direct deposits, or paper checks.
- Points. As in a video game, you earn points. And as in a video game, you (usually) can’t trade it for real money. But you can redeem it for things like travel, merchandise, gift cards, or even charitable donations. (But some cards let you get cash back instead.)
- Miles. You usually get miles with travel-focused cards. You can redeem them for travel-related expenses like flights, hotel stays, and car rentals.
How to Calculate Credit Card Rewards Value
How you calculate your credit card’s rewards value depends on the type of rewards card you have.
Cash back is pretty straightforward. Just multiply your spending by the percentage your card offers for that category. So, if the fictional Ultimate Points Earner Card nets you 2% on all purchases, and you spend $500 this month, you earn a total of $10 cash back this month. Just move the decimal to the left twice to convert the percentage into a whole number, then do the math.
Spending x Cash-Back Percentage = Cash Back
S x P = C
500 x 2% = C
500 x 0.02 = $10
You have $10 cash back.
Points cards are a little more finicky because certain redemption methods secure you a greater return than others. But to get a general estimate of what each point is worth, you simply divide the value of the reward (or each available reward) by the number of points.
For example, let’s say one of the redemption options on the Ultimate Points Earner Card is a $750 travel voucher when you reach 75,000 points. To find the value of each point, use the formula:
Rewards Value ÷ Number of Points = Point Value
R ÷ N = P
750 ÷ 75,000 = $0.01
Your points are worth 1 cent each.
Miles can also be tricky because it depends on whether the card offers a fixed redemption rate or flexible (depending on how you redeem them) or transferrable miles.
If you’re comparing travel card candidates, you may have to do the math several times to account for the various options. Though you can just choose the one you’d most likely use or the easiest option for a quick and dirty method.
Either way, the math itself is just as simple as the other options. For example, your Ultimate Points Earner Card has a partnership with Delta, the airline you fly most. On Delta’s site, you find that a $500 flight is equivalent to 50,000 miles. To find the breakdown of how much each mile is worth, use the same formula, but substitute miles for points.
Rewards Value ÷ Number of Miles = Per-Mile Value
R ÷ N = M
500 ÷ 50,000 = $0.01
When transferred to Delta’s partner program, your miles are worth 1 cent.
Factors Affecting Credit Card Points Value
Calculating your rewards doesn’t stop at the basic math. There are other factors that impact the calculation as well.
Credit card points can come with various redemption options, such as travel purchases, cash back, gift cards, or statement credits. Typically, the value of your redemption varies based on the option you choose. In general, travel redemptions tend to provide higher value per point compared to cash back or other cash-out methods.
For example, let’s say the fictional Ultimate Points Earner Card earns 2x points across the board. But when you redeem rewards, you have a few options, all with slightly different redemption rates:
- Cash back: If you cash out, your points are worth $0.0075, three-quarters of a cent, for every point. So, 50,000 points equals $375.
- Rewards portal: To encourage you to use its portal, the Ultimate Points Earner Card offers $0.01, a full cent, for every point if you do. So 50,000 points would equal $500.
- Gift cards: Gift cards operate similarly to cash back on this card and are worth the same three-quarters of a cent. So with 50,000 points, you can get $375 worth of gift cards.
Loyalty Program Partnerships
Credit card issuers often have partnerships with loyalty programs, such as airlines or hotels.
These programs allow you to transfer your points to these partners, opening additional redemption options and potentially increasing the value of your points. You can often redeem these rewards for flights, hotel upgrades, or exclusive experiences and events.
Gift Card Partnerships
Many credit cards allow you to convert cash back or points into gift cards. Of course, the exact value varies by credit card issuer. Certain credit cards state that 1 point is equal to 1 cent per point, while others are worth a little less.
It’s usually not the best idea to take less than you could get another way. But that doesn’t mean there’s never a reason to take the gift cards, even if they’re worth less or equal to cash.
First, you can use gift cards for their intended purpose: as a present for someone else. But you can also take the gift cards if your points are soon to expire and another option, such as converting to a hotel stay, isn’t attractive.
If your credit card has various redemption options, you need to make sure that option is worth it. To do the math, you must find your card’s redemptions rates, which determine how much your points are worth based on how you plan to use them.
Some redemption rates are one-to-one, meaning one credit card point is equivalent to one cent, $1, or one loyalty program point. Others have a lower rate.
Maximizing the Value of Credit Card Points
“Travel hacking” is a term you’ll come across if you start to delve deeper into the credit card rewards world. It’s essentially a method experienced travelers use to earn the most miles or points possible, which many of them use to score perks like free travel or upgraded accommodations.
Even if you don’t travel, there are many ways to reach the ultimate points haul, whether you want to use those points for cash, gift cards, or just paying off your card each month.
Utilizing Bonus Categories & Offers
To attract new customers and keep old ones interested, many credit card companies offer promotions in the form of higher cash back or points for a limited time. Signing up for a credit card during these promotions can help you maximize how much cash you earn, especially if you spend often in the promoted categories.
For example, if your highest spending category is groceries, using a card with 5% back in groceries will offer you the most bang for your buck.
Researching & Planning Redemptions
Often, the way you redeem your points affects how much they’re worth. For instance, some credit cards offer a higher value when you redeem your points through their travel or entertainment portals rather than just cashing out.
Your credit card company explains its redemption system in the fine print of the agreement you originally had to sign, but many also include it in FAQs and informational pages on their websites. Take the time to research which redemption option offers you the best payout and plan your purchases accordingly.
Apps like MaxRewards can help you pick the right rewards card for you and track all your cards in one place. Plus, it can show you which credit cards offer the best cash back for certain purchases.
Credit card points are undeniably one of the nicer perks of using credit cards responsibly. When you find the card that works best for your spending needs, budget, and redemption needs, you can earn hundreds per year, if not more, just for buying things you were already going to buy.
However, there’s a lot more to a credit card than the points it offers. That should be just one factor you consider when looking for your next credit card. For example, think about the annual fee. Will it be less than the points you earn? Or if you plan to carry a balance, pick a low-interest credit card to prevent your rewards from getting eaten by interest.
No matter which card you go for, make sure it’ll work for you now and in the future.