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7 Types of Credit Card Rewards Programs & How They Work

Consumers with strong credit scores have a vast assortment of rewards credit cards at their fingertips, from no-frills retail cards to ultraluxe travel cards with eye-popping annual fees. Let’s take a closer look at what these cards have to offer and how to maximize your rewards if you own one.

Major Types of Rewards Credit Cards

The following are seven major reward credit card categories. Bear in mind that, in virtually all cases, rewards accrue on net purchases only. Transactions that don’t qualify for credit card rewards include:

  • Cash advances, including ATM cash withdrawals
  • Balance transfers
  • Chargebacks, including merchandise returns

Certain other types of transactions may also be ineligible for rewards earnings. Common exclusions include:

  • Lottery tickets
  • Casino chips
  • Annual fee payments
  • Interest charges
  • Unauthorized charges

Be sure to read issuer disclosure documents for a full list of transaction types ineligible to earn credit card rewards.

1. Cash-Back Credit Cards

Cash-back credit cards reward purchase spending with points or reward units that are exchangeable for cash or cash equivalents, such as prepaid gift cards.

Redeeming Cash-Back Rewards

In some cases, rewards automatically redeem via statement credit each billing cycle. In others, rewards accrue indefinitely until the cardholder chooses to redeem them via statement credits, bank account deposits, or paper checks. Many issuers allow noncash redemptions for items such as general merchandise, travel, and charity donations, though these options may devalue rewards. Some cards impose minimum redemption thresholds ranging from $10 to $100. Others allow cardholders to redeem in any amount.

Cash-back loyalty currency has no intrinsic value outside the issuer’s rewards program. It does not count toward your minimum payment when redeemed as a statement credit against prior purchases.

Rates of Return

Most cash-back cards offer theoretically unlimited reward-earning potential. Average rates of return on spending vary from under 1% to more than 2%, depending on the card’s terms and underwriting criteria.

Annual Fees

Though annual fees are relatively rare, they’re present in the category’s upper echelons. For instance, the Blue Cash Preferred® Card from American Express, which earns up to 6% cash back on select purchases, has a $95 annual fee.

Credit Requirements

Premium cash-back credit cards that earn upward of 1.5% on purchase spending generally require above-average credit. However, those in the midst of building or rebuilding credit may still be able to qualify. The Capital One QuicksilverOne Cash Rewards Credit Card is one of several cash-back cards specifically designed for folks with less-than-perfect credit.

Types of Cash-Back Credit Cards

Cash-back credit cards come in three main types:

  • Category-Based Cash-Back Credit Cards. Category-based cards have rotating bonus spending categories that change periodically, most often each quarter. Bonus category purchases earn cash back at higher rates than everyday purchase spending. Most category-based cards cap category spending on a quarterly or annual basis. For instance, the Chase Freedom® and Discover it® cards both cap spending in their 5% cash-back categories at $1,500 per quarter. Above the cap, category spending earns an unlimited 1% cash back. Categories are usually broadly defined; supermarkets, restaurants, gas stations, and drugstores are all common spending categories.
  • Tiered Cash-Back Credit Cards. Think of cash-back tiers as permanent spending categories. Some tiered cash-back cards impose quarterly or annual spending limits. For instance, the Blue Cash Everyday® Card from American Express caps bonus spending in its 3% tier (grocery stores) at $6,000 annually, after which grocery store spending earns an unlimited 1% cash back. Most tiered cash-back cards have two to four tiers, with the top tier rarely exceeding 6% cash back.
  • Flat-Rate Cash-Back Credit Cards. Flat-rate cash-back credit cards apply the same rewards rate to all eligible purchases. In most cases, the rate of return ranges from 1% to 2%, though temporary promotions and sign-up bonuses may push returns higher at times.

2. Rewards Points Credit Cards

This is the most nebulous rewards credit card category and technically encompasses more specific rewards cards such as travel and gas credit cards (more on those below). As a general rule, though, this type of credit card is set apart from pure cash-back cards and travel or gas cards by an extremely eclectic menu of redemption options, with lots of opportunities to boost points’ redemption values.

Redeeming Credit Card Rewards Points

Point-based credit card rewards are generally redeemed through issuers’ loyalty portals or directly at the point of sale with select partners, such as e-commerce websites and travel vendors. Some loyalty portals look superficially similar to e-commerce websites, the main difference being that they’re off-limits to noncardholders. These deluxe loyalty portals may accommodate cash purchases in addition to rewards point redemptions. Other credit card loyalty portals are more sparse, existing for the sole purpose of redeeming rewards points.

Either way, rewards points can generally be exchanged for a wide variety of items, including merchandise, travel, gift cards, experiences, charitable donations, and cash. Unlike cash-back rewards, which usually realize their highest value through cash redemptions, cash and cash equivalent redemptions may devalue credit card rewards points.

Each issuer has its own rules, and loyalty currency values sometimes vary within issuers’ stables. Like cash-back cards, rewards point cards may allow redemptions in any amount or require cardholders to wait until they’ve reached a predetermined threshold.

Rates of Return

The more versatile the rewards currency, the more difficult it is to calculate a universal rate of return. Expect your rate of return to vary depending on how you choose to spend your money and redeem the points you earn in exchange.

As a general rule, the average redemption rate for noncash loyalty currency is lower than the standard $0.01-per-unit cash-back redemption rate, as some cards penalize noncash redemptions and points transfers to partner programs, such as hotel or airline loyalty schemes. For instance, Membership Rewards points earned on purchases made with the Amex EveryDay® Credit Card are worth $0.005 apiece when redeemed for purchases made through the Membership Rewards portal and up to $0.01 apiece when redeemed for partner gift cards. Check with your issuer for more details.

Annual Fees

With exceptions, credit cards that earn versatile rewards points and don’t heavily favor one type of redemption over any other have modest or nonexistent annual fees, typically under $100 per year. The exceptions generally involve rewards point credit cards structured toward frequent travelers.

For instance, the Chase Sapphire Reserve®’s $550 annual fee offers a generous rewards program that promises elevated redemption rates on travel bookings and a vast array of value-added perks, such as complimentary airport lounge access and a $300 annual travel credit. For this reason, Sapphire Reserve is generally considered a travel rewards credit card.

Credit Requirements

Most rewards points credit cards require above-average credit. As a general rule, less-generous cards have looser underwriting requirements.

3. Gas Credit Cards

Gas credit cards help consumers with long commutes or active family schedules save money on gas.

Gas cards with exceptionally high rates of return generally earn points or confer discounts exclusively on gas purchases and tend to bear the brand of a particular gas vendor, such as Sunoco or BP. Such cards are fine for organized consumers who don’t mind remembering to use them whenever they fill up, but they’re not appropriate for general spending.

Some cash-back and rewards points credit cards have tiers or categories that reward gas spending on a temporary or permanent basis. Gas is a favored Chase Freedom category at least once per year, for instance.

Redeeming Gas Rewards

Branded gas credit cards generally apply earned rewards as statement credits against prior gas purchases or instant discounts at the point of sale. The precise mechanism varies by issuer but generally requires no action on the cardholder’s part.

Nonbranded gas credit cards’ redemption schemes are more variable and may require cardholder action.

Rates of Return

Branded gas credit cards typically have impressive rates of return, often $0.05 or greater per $1 spent. Nonbranded cards’ rates of return typically top out at $0.05 per $1 spent. The highest rates of return on nonbranded gas spending generally come courtesy of bonus spending categories or tiers that may have quarterly or annual spending caps, eroding net returns.

Annual Fees

Branded gas credit cards almost never charge annual fees. Other types of rewards cards that favor gas spending may charge annual fees, though fees north of $100 per year are rare.

Credit Requirements

Branded gas credit cards may have surprisingly lax underwriting standards, particularly when they’re not part of a major card network such as Visa or Mastercard. However, non-network cards generally have high interest rates – anywhere from 5% to 15% higher than premium cash-back credit cards’.

4. General-Purpose Travel Rewards Credit Cards

All travel rewards credit cards earn travel loyalty currency in one form or another. Branded travel cards bearing the imprint of a particular travel vendor are sometimes lumped in with nonbranded, general-purpose travel rewards cards that earn more versatile rewards. But the two domains are distinct in important ways. The two most popular types of branded travel cards, hotel and airline cards, are discussed in separate sections below.

Redeeming Travel Rewards

General-purpose travel rewards cards earn generic points or miles that are redeemable for virtually any travel purchase, either as statement credits against prior purchases or as direct award bookings that reduce or eliminate out-of-pocket costs. In most cases, generic travel loyalty currency can be redeemed for nontravel items as well, such as cash and cash equivalents, merchandise, experiences, and point-of-sale purchases with partner vendors. However, nontravel redemptions often devalue loyalty currency. Read your rewards program’s fine print to confirm.

Some general-purpose travel rewards cards have attractive transfer arrangements with participating travel partners, such as major hospitality and airline families. The gold standard is a 1-to-1 transfer ratio, meaning 1 generic point or mile earned through credit card spending equals 1 partner point or mile. Since partner currencies’ redemption values can vary widely – and often exceed issuer currencies’ values in even the best-case scenario – transfers are definitely worth exploring.

Rates of Return

Most travel rewards cards earn no more than 3 points or miles per $1 spent, though temporary promotions or favored categories may push rates of return higher. Most cards’ currencies are worth $0.01 apiece when redeemed against prior or current travel purchases, but some premium cards reserve special, elevated redemption values for travel redemptions.

For instance, the Chase Sapphire Preferred® Card adds a 25% bonus to all travel redemptions, while the Chase Sapphire Reserve Card boosts travel redemptions by a whopping 50%. That ups their respective travel redemption rates to $0.0125 per point and $0.015 per point and their total returns on travel spending to 2.5% and 4.5%.

Annual Fees

Annual fees are common in the travel rewards space. Entry-level travel cards’ fees range from $0 to approximately $100. Premium and superpremium cards’ fees can top $400 or $500 and may reach higher in isolated cases. These high-end cards generally have luxe benefits, like complimentary airport lounge access, that collectively offset or even exceed the cards’ annual fees when fully exploited each year.

Credit Requirements

Most general-purpose travel rewards cards require excellent credit. Exceptions are offered mainly by lesser-known entry-level cards with modest rewards programs and no annual fees.

5. Hotel Credit Cards

Hotel credit cards reward frequent travelers content to keep the bulk of their hospitality spending in one hospitality family. Branded hotel credit cards favor spending at hotel, resort, and short-term rental properties owned or operated by a particular hospitality group, such as Starwood-Marriott or Hilton. They generally earn points at higher rates on spending within the issuer’s group and may have intermediate tiers that reward other types of spending popular with frequent travelers, such as airline and restaurant purchases.

Redeeming Hotel Rewards

The best way to redeem loyalty currency earned through hotel card spending is for award nights at participating hotel and resort properties. In most cases, redemptions are made directly with the hospitality vendor, either online or by phone booking. Most hotel loyalty currencies are redeemable for nontravel items, such as merchandise and cash equivalents, but such redemptions invariably dilute points’ value. Read your rewards program’s fine print to confirm.

Like general-purpose travel rewards cards, some hotel cards have transfer arrangements with participating travel partners, usually airlines and car rental companies. However, hotel cards’ transfer arrangements often carry unattractive ratios: 10-to-1 or even 15-to-1, a far cry from the irresistible ratios of some premium general-purpose cards.

Rates of Return

Hotel cards’ rates of return vary widely by issuer, cardholder spending patterns, and redemption type. Most hospitality companies organize their redemption tables by category or tier, which corresponds to higher or lower levels of service and amenities. Per-night point requirements for award nights and room upgrades rise with each successive tier. Since nightly rates may vary substantially by factors like location, demand, season, and room type, the correlation between these per-night point loads and the underlying nightly tariff is often quite loose.

As a general rule of thumb, you’re doing well if you can consistently achieve a per-point redemption value of $0.015 or better on hotel redemptions. However, each hospitality group’s loyalty currency has its own intrinsic value. Cards that have higher reward-earning rates – say, 10 or 12 points per $1 spent – generally have lower per-point redemption values.

Annual Fees

Most hotel cards charge annual fees. Entry-level cards’ fees generally come in at under $100, while premium and superpremium cards can levy recurring charges as high as $400. As in the general-purpose travel space, higher annual fees generally pair with more-generous benefits packages that mostly or entirely offset their cost when fully exploited.

Credit Requirements

Most hotel rewards cards require excellent credit.

6. Airline Credit Cards

Airline credit cards reward consumers loyal to a specific airline. Like branded hotel cards, branded airline cards promise an elevated rate of return on spending on airfare, class upgrades, and often incidental charges with a particular airline, such as Delta or United. They may also have intermediate spending tiers for other travel-related or travel-related purchases, such as hotel and restaurant purchases.

Redeeming Airline Rewards

The best way to redeem airline loyalty currency is for award travel booked through the issuing airline and any applicable partners. Redemptions must be made directly with the airline, usually through its online booking portal. Nontravel redemptions for items such as consumer goods and magazine subscriptions, if they’re allowed, almost always result in lower redemption values. Likewise, airline cards’ transfer arrangements are, on average, less attractive than general-purpose travel rewards cards’.

Rates of Return

Like hotel cards, airline cards’ rates of return depend largely on the terms of the rewards program and the cardholder’s spending habits. Most airlines organize their redemption tables geographically, with redemption requirements dependent on either a flight’s origin and destination regions (for instance, continental North America to continental Europe) or distance in miles (for instance, 3,000 to 3,999 miles). Final per-mile redemption values, therefore, depend on the characteristics of the award flight, not the cash value of the corresponding airfare.

Some discount airlines forgo this more complicated framing and assign fixed or nearly fixed values to their loyalty currency. Southwest and JetBlue both take this approach. Fans of simple loyalty programs would do well to consider the no-annual-fee JetBlue Card or the reasonably priced Southwest Rapid Rewards® Plus Credit Card.

Annual Fees

Annual fees are common in the airline rewards card realm, with exceptions for entry-level cards such as the JetBlue Card. The typical airline card’s annual fee comes in at just under $100, but some high-end cards, such as the Delta Reserve® Credit Card from American Express and the United Club Infinite Card, charge annual fees north of $500. These high-end cards’ formidable benefits packages, which invariably include complimentary airport lounge access (enrollment required), easily offset these levies.

Credit Requirements

Most airline cards require excellent credit.

7. Retail Credit Cards

By some measures, retail credit cards are the most eclectic and difficult to define of any category on this list. After all, any credit card that rewards spending at retailers, as all rewards credit cards do, is technically a “retail credit card.”

However, true retail credit cards generally bear the brand of a particular retailer, be it a major international chain such as Walmart, a membership-based warehouse store such as Costco, a national department chain such as Macy’s, or a niche retailer such as Cabela’s.

Some retail credit cards belong to major credit card networks, such as Visa or American Express, and are accepted by any network-participating merchant. Others are store cards, meaning they’re accepted only at the issuing retailer’s locations.

Redeeming Retail Rewards

Retail credit cards’ rewards schemes are as varied as their issuers. Some branded store cards, such as the Target REDcard™, apply rewards as immediate point-of-sale discounts – 5%, in REDcard’s case. Others automatically apply rewards as monthly, quarterly, or annual statement credits. Yet others apply rewards at the point of sale but give cardholders discretion over which purchases to offset.

Rates of Return

Premium non-network store credit cards frequently offer eye-popping rates of return; 10% or higher is not outside the realm of possibility. Retail credit cards operating under Visa or Mastercard generally have lower average rates of return. For instance, the Costco Anywhere Visa® Card by Citi earns an unlimited 2% back on Costco spending and 4% back on Costco gas spending up to the first $7,000 spent per year.

Annual Fees

Most retail credit cards forgo annual fees. The warehouse store category presents a technical exception, as warehouse club members must pay annual dues, typically in the $50 to $60 per person range. Warehouse club cards generally don’t charge annual fees on top of these dues, however.

Credit Requirements

Like branded gas credit cards, branded retail credit cards may have lax underwriting standards when operating outside major credit card networks. However, they may have higher financing charges.

Tips to Maximize Your Credit Card Rewards Earnings

If you’d like to maximize your return on rewards credit card spending, follow as many of these tips as you can.

1. Pay Off Your Balance in Full Each Month

If you heed just one piece of advice on this list, make it this one. Once your card’s 0% APR introductory promotion (if any) ends, carrying a balance from month to month will subject you to potentially hefty interest charges – almost certainly higher than 10% APR, and in some cases higher than 20% APR. That’s several times higher than most rewards cards’ average rates of return on spending.

2. Stay Current on Payments

If you must carry a balance from month to month, stay current on your payments. Under the terms of your credit agreement, you may risk forfeiture of any rewards earned to date if you miss a payment due date.

3. Earn Any Available Sign-Up Bonus

Sign-up bonuses – also known as “welcome offers” or “early spend bonuses,” depending on the issuer – occur in every rewards credit card category described above. Most require new cardholders to meet a predetermined spending threshold within an introductory period typically lasting three to four months. To reach the required spending threshold during the introductory period, use your card to pay big-ticket expenses, such as your housing and car payments.

4. Understand Restrictions & Limitations

If your rewards credit card has spending tiers or bonus categories, know exactly how much you stand to earn in each. For heavy spenders, a card with a 2% flat rate of return may turn out to be more lucrative than a card that earns 5% or 6% on the first $6,000 in annual purchases in a particular category. For light spenders, the opposite is probably true.

5. Avoid Cards With Annual Fees

An annual fee will always erode your rewards credit card’s return on spending. In the upper echelons of the rewards credit card realm, a once-per-year membership charge may be a necessary evil and a manageable sacrifice that marginally reduces a heavy spender’s net rewards haul. But if your budget is modest or you’re not inclined to aim for an overly generous card, you’d do better to limit your choices to fee-free cards.

6. Maximize Other Potentially Valuable Benefits

Loyalty currency is just the beginning. Premium and superpremium rewards credit cards typically offer value-added benefits whose combined value may well exceed the value of earned rewards points. Such benefits might include travel spending credits, airport lounge memberships, hotel or airline upgrades, travel insurance coverage, exclusive deals and discounts with merchant partners, and card- or issuer-specific fringe benefits.

7. Mind Point Expiration Dates

Some credit card rewards programs set expiration dates for earned rewards points. These expiration windows can be as short as six to 12 months or as long as four to five years. If you can’t find a suitable card without expiration dates, remember to redeem frequently enough to preserve the full value of your earnings.

8. Look for Opportunities to Earn Rewards at Higher Rates

Many rewards credit cards offer exclusive opportunities to boost net return on spending through targeted purchases or limited-time offers. For instance, for a limited time, the Chase Sapphire Reserve Card earns 10 points per $1 spent on eligible Lyft purchases – more than three times the normal rate of return on travel purchases. Likewise, Chase’s Ultimate Rewards Mall has cardmember-exclusive bonuses worth upwards of 10 points ($0.10) per $1 spent.

Final Word

Not all credit cards earn rewards. While it may not seem as exciting to own a nonrewards credit card with a low regular APR or long 0% APR introductory promotion, both types of cards appeal to millions of American consumers seeking low-cost financing for big-ticket purchases, such as international vacations, home improvement projects, weddings, honeymoons, and new business enterprises.

If you’re looking to temporarily carry a monthly balance without inviting financial ruin, a nonrewards credit card may well be in your future. Given that the average credit card’s interest rate is so much higher than the average rewards credit card’s rate of return on spending, a low- or no-APR credit card’s net debt service savings could far exceed the value of any rewards earned on an identical amount spent with that premium rewards card you’re eyeing.

Do you have a rewards credit card in your wallet? Which one?

Brian Martucci writes about credit cards, banking, insurance, travel, and more. When he's not investigating time- and money-saving strategies for Money Crashers readers, you can find him exploring his favorite trails or sampling a new cuisine. Reach him on Twitter @Brian_Martucci.