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How do credit card rewards work in the U.S.?

n the U.S., there are three main types of credit card reward programs: cash back, issuer rewards programs and co-branded rewards programs. Before signing up for a new card, learn about the differences to determine which card might be right for you.

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Many American cards offer rewards when you use the card to buy a product or service—one of the major reasons they are so popular in the U.S. Even if you pay your credit card bill in full each month, and never pay any interest, you can still earn valuable rewards.

In the U.S., there are three main types of credit card reward programs: cash back, issuer rewards programs and co-branded rewards programs. Before signing up for a new card, learn about the differences to determine which card might be right for you.

Here’s an overview of how the rewards programs work, the different types of earnings rates and how to shop for a credit card. 

Cash back rewards programs

Cash back rewards programs are the easiest to understand and use. Generally, whenever you use your card, you’ll earn a percentage of your purchase amount as cash back reward. For example, if you earn 1.5% cash back on every purchase, you’ll get $1.50 in cash rewards for every $100 you spend.

Depending on the card, you may be able to redeem the cash back rewards for statement credits (a credit towards your credit card’s balance), deposit the money into a bank account (some cards will require that it be an account from the same issuer) or have the issuer send you a check in the mail. Sometimes, you’ll need to accumulate a certain amount of rewards, such as $25, before redeeming.

A cash back card could be best if you’re looking for simplicity. It’s easy to know the value of the rewards you earn, and often easy to redeem the rewards. However, other types of programs can offer more valuable rewards.  

Card issuer rewards programs

Many credit card companies create and manage rewards programs for their credit cards. There are American Express Membership Rewards®, Chase Ultimate Rewards® and Citi ThankYou® Rewards, and you can use credit cards from each company to earn points in their respective programs. 

As with cash back rewards, you’ll earn a certain number of credit card rewards points per dollar you spend using your card. The value of each point can depend on your card, the program and how you choose to redeem the points. The specific redemption options vary, but you can often choose to redeem your points for cash back, gift cards, merchandise, travel or transfer your points to an airline or hotel loyalty program.

The flexibility can be helpful, and sometimes allows you to redeem points at a much higher value than one cent per point. However, you’ll want to carefully compare your options, particularly for travel redemptions. For example, consider how many points you’ll to book airfare through the rewards program versus how many points you need to transfer to a frequent flyer program to then redeem the airline miles for rewards airline tickets.  

Sometimes, there can be a large difference in the redemption values depending on the option. With American Express Membership Rewards®, your points may be worth one cent each when you use them to book travel but only 0.6 cents when you redeem them for cash back. 

A card issuer rewards program could be best if you’re willing to learn the ins and outs of the program. While it’s not as simple as cash back rewards, the points could be more valuable in the long run and some cardholders enjoy the extra flexibility. 

Co-branded rewards programs

Some credit card issuers partner with companies to offer co-branded credit cards that you can use to earn points or miles in the companies’ loyalty programs. You can find co-branded cards from a variety of companies, including retailers, gas stations, cruise lines, hotels and airlines.

Co-branded credit cards can offer some of the best rewards if you’re already a loyal customer, as the cards often come with extra perks in addition to the rewards-earning capabilities. For example, an airline credit card might give you and your travel companions a free checked bag, priority boarding and a discount if you use the card for in-flight purchases. 

However, it can be difficult to understand how much the rewards are worth, and you’re locked into earning points or miles in that particular program. If you wind up moving to a different area, or the program’s rules change, you might find the rewards you’ve earned aren't as valuable to you anymore. Also, the value of a point or mile can vary greatly. 

Even if you compare two hotel credit cards that offer five points per dollar, the points in one program might be worth twice as much as points in the other based on how many points you need for free hotel stays. 

If you travel a lot or enjoy shopping at a particular chain of stores, look to see if there are co-branded credit cards available and try to determine how much you’ll earn in rewards using the card. But also see if there are any card issuer programs that allow you to transfer points to the loyalty program. 

Sometimes, you can earn more rewards with a card issuer program and retain the flexibility of transferring points to multiple programs or redeeming them for alternative types of rewards.

Earn rewards with flat rate, tiered or rotating rates

In addition to the three types of rewards programs, credit cards in the U.S. generally offer one of three types of rewards rates: flat rate, tiered or rotating.

Flat rate rewards

With a flat rate rewards card, you’ll earn the same amount of cash back, points or miles with every purchase. For example, depending on the rewards program and card, you might earn 1.5% cash back, 1.5 points or two miles per dollar you spend with the card.

A flat rate rewards program can be simple to use and potentially offer the most rewards if you tend to make many different types of purchases throughout the month. 

Tiered rewards

Tiered programs offer different levels of bonus points or rewards depending on where you make a purchase. With the Blue Cash Everyday® Card from American Express, for example, you earn 3% cash back on the first $6,000 you spend at U.S. supermarkets each year, 2% cash back at U.S. gas stations and U.S. department stores and 1% cash back on everything else.

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Most tiered programs give you one point, mile or percent cash back on non-bonus categories, and different cards will offer bonuses on different types of purchases. You may also be able to earn a lot of rewards if a card’s bonus categories align with your spending habits.

Gas, dining and travel are three common bonus categories, and if you frequently travel, you may want a travel rewards card that offers bonus points on travel purchases. But there are many tiered options available, and you could could alternatively get a card that offers bonuses at supermarkets if you tend to stay in and cook at home.  

Rotating rewards

Rotating rewards programs aren’t as common as flat rate or tiered rewards, but there are a few cards that have this type of earning structure. Generally, you’ll earn five points (or 5% cash back) per dollar you spend on the first $1,500 you spend on purchases within certain categories each quarter. 

The card issuer chooses the categories, which could be things like gas stations, dining, grocery stores or even purchases on Amazon. It’s a bit of a gamble, but if the categories align with your purchases, then the five points (or 5%) is a fairly high rewards rate. You’ll still generally earn one point or 1% cash back per dollar you spend on other purchases.

Finding the best rewards credit card

One you’ve determined the type of rewards program and earning structure you’d like to use, you’ll still need to figure out which credit cards to apply for. The best credit card offers may only available to those with a high credit score, although there are also options for people who haven’t established a U.S. credit history yet. In either case, here are a few additional things you’ll want to consider:

Fees 

First, you’ll want to see if the card has an annual fee. This is a fee you’ll need to pay each year simply to keep your account open, although some card issuers will waive the fee the first year to entice new applicants. Generally, cards with annual fees have higher rewards rates and more cardholder benefits. But you’ll need to determine if you plan on using your card enough to justify the fee.

Additionally, look to see if the card has a foreign transaction fee. Many non-travel credit cards (and even a few travel-focused cards) charge this fee on all purchases made outside the U.S. or in non-U.S. dollars. Often the fee is around 2.7% to 3% of the purchase amount, which can add up quickly if you’re using the card often.

Intro bonuses

Many rewards credit cards offer sign-up bonuses for new cardholders. These intro bonuses generally require you meet a spending requirement within a certain time period. For example, you may receive an extra $150 if you make $500 worth of purchases with your new card during the first three months after your account opening. 

Signing up for a credit card that has a large intro bonus can be a great way to earn lots of rewards, particularly if you have a large purchase or trip coming up.

Interest

Credit cards may have different interest rates for purchases, balance transfers (when you move debt from a different account to your credit card) and cash advances (when you use your credit card like a debit card to withdraw cash). They’re all displayed as annual percentage rates (APRs), and a lower APR means less interest will accrue on credit card debt. 

It’s generally best to only use your card for purchases, unless your card has a special balance transfer offer. With most cards, you won’t have to pay any interest on your purchases when you pay your bill in full each month. However, if you think you might have to pay less than the full amount and revolve or carry part of the balance to the next month, a card with a lower APR could lead to paying less in interest. 

The takeaway 

Finally, review the card issuer’s website to find the terms and conditions and cardholder agreement forms. These will cover all the fine print fees and exceptions, such as how and when your rewards expire. You can also look for reviews and best-of lists, which can help you understand the pros and cons of a particular card and how it compares to other, similar credit cards. 

To learn more about managing and building credit in the U.S., check out Nova’s many posts on the topic in our resources section. 

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