How Do Credit Card Points Work?

Finding the right credit card can be a daunting task. Consumers have tons of options, all with their own set of perks and drawbacks. One of the most popular types of credit cards available today is rewards cards. With a rewards credit card, cardholders get something in return for simply making purchases and using the card. 

You’ll hear these cards advertised with phrases like airline miles, percent cash back, and rewards points— but you might be wondering, what does it all mean? In this article, we’ll break down one of these commonly used phrases: credit card points. By the time you finish reading, you’ll know what they are, how they work, and how a points credit card can benefit you!

What Are Credit Card Points?

In short, credit card points are a type of reward for using your card. As you spend money, you’ll earn points, which can then be redeemed for merchandise, gift cards, or even cash back. As with most rewards programs, it’s important to be well-versed in how the credit card points work for your particular card.

How Do Credit Card Points Work?

Before you can decide which credit card points system is right for you, you must first learn how these rewards are calculated. Typically, a credit card company will give you so many points for each dollar that you spend.

Always remember that the big print giveth, the little print taketh away.”

So if a card offered 1.5 points for every dollar and you spent $50, you’d have a total of 75 points ($50 x 1.5= 75) racked up. Some cards will give you a flat rate across all categories, while other cards will have special offers for certain categories like grocery stores or gas stations. 

There are also cards where the points will vary from category-to-category on a monthly or quarterly basis, and this can get complicated. As with any contract, whether with a credit card company or others, always remember that the big print giveth, the little print taketh away. Our recommendation is to fully understand the terms and restrictions before signing up for a credit card. 

Aside from day-to-day expenditures, you may be able to earn points for:

• Sign-up bonuses. Some companies offer a set number of points just for signing up for the card. Others will give you bonus points once you spend a certain amount after opening your card.
• Getting your friend to open an account. Referrals are a common way to earn extra points.
• Card milestones. Sometimes it pays to find the right loyalty program. You may be able to earn points just for having the card for a certain period of time.

Your points will continue to accumulate until you are ready to use them, as long as they don’t expire. Typically, to redeem your points, you will log onto your online account and navigate the rewards webpage. From there, your credit card company will outline your redemption options so you can claim what you earned!

Finding the Best Points Credit Card

The key to finding the best points credit card is finding one that offers rewards that work for you. You’ll find that across credit card companies, cards will vary on: 

Points per dollar

As we talked about earlier, the amount of points per dollar you earn isn’t the same across all credit cards. Be mindful of introductory offers— though they may promise more points upfront, you may lose out in the long run.  Pay close attention to the interest rate after the introductory period expires. These can be excessive as compared to a non-rewards card.

Point caps

Some cards will limit the number of points you can earn in a given amount of time or the amount of points you can earn in a certain category.  Others will have no caps on the number of points you earn. If you frequently use your credit card, you’ll probably want a card without caps to maximize what you get back.

Redemption options

Credit card companies offer a variety of redemption options. Some cards will be limited in what they offer, while others will give you a whole host of reward options. The following are some options that you may commonly see across cards:

• Cash back cards. Consumers can redeem points for cash. The cash value that points are worth will vary from company to company.
• Statement credit. Want a discount on your next credit card bill? Some points can go towards statement credit.
• Merchandise. In some cases, the credit card company will have a “store” where you can cash in points for merchandise.
• Gift cards. Have a store that you love? Gift cards to select retailers and restaurants is another common redemption option.
• Travel miles or hotel accommodations. Prefer hotel points or airline mileage to more general rewards? The points (or miles) consumers earn can sometimes be redeemed for travel rewards like airline tickets or nights at hotels. That can add up to a lot of flights or hotel stays.

Again— you may not see all of these options for your card. This is why it’s important to ensure that the card you get has rewards you’ll actually use. And now that you know the difference between the rewards types, you can start digging into industry research, such as this U.S. News list of the best airline credit cards of 2021.

Redemption period

Along with point caps, you may also find that some cards have a limited redemption period. That is, if you don’t use your points in a certain amount of time, you’ll use them. This may be in the fine print— especially if the points expire quickly.  Also, most credit cards have a minimum number of points that must be accumulated before any rewards can be redeemed.   

Interest rates and fees

Don’t get so caught up in the rewards options and stipulations that you forget to consider the classic credit card factors like interest rates and annual fees. 

Take everything into consideration when choosing the right one for you. A card that offers great rewards but has high annual fees may not be as sweet of a deal as you think. Similarly, if you don’t think you’ll be paying off your balance every month, having a card with a higher than normal APR may not be a smart move. 

Rewards cards generally work best for those individuals who typically pay off their credit card balances each month. The reason is that a reward card tends to have higher interest rate than non-reward card, so carrying a balance may make one “upside down” where the interest rate cost is greater than the reward value. 

Also, if you are considering an introductory offer that has a zero- or low-interest rate, be sure to read the fine print. There are some cards that will retroactively charge interest during the introductory period if the minimum payment is missed by even a day.

Don’t forget that applying for new credit cards to “chase” points will affect one’s credit and that cancelling old existing credit cards can also affect one’s credit. There will always be new offers out there as the credit card business is very competitive, but if you have one that is meeting your financial needs, be very wary of cancelling or adding new credit cards to your credit file.

Conclusion

Credit cards that offer points are a great way to earn rewards whenever you make purchases. But not all points credit cards operate in the same way, so be sure to read the fine print and choose a truly best card for your spending habits and the types of rewards you’d like to earn.