How credit card rewards programs work and which to choose
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Business credit cards offer enticing rewards programs, converting everyday expenses into points, cash back, or travel benefits.
This article delves into the mechanics of these rewards programs, shedding light on how they work and what they mean for your company's financial management.
How credit card rewards work
Credit card rewards work by giving cardholders points, cash back, or other benefits based on their spending. Rewards are funded primarily through interchange fees paid by merchants, along with cardholders' annual fees and interest payments to the credit card companies.
The three main types of rewards are points, miles, and cash rewards. That said, points and miles function similarly, allowing you to trade in those points (or miles) for specific redemption options, such as:
- Free or discounted flights, hotel stays, and car rentals
- Gift cards to specific vendors
- Discounts on everyday purchases (like at grocery stores, gas stations, or supermarkets)
- Charitable donations
The way you gain these points or miles depends on the specific policies of the reward program, and each reward program usually comes with bonus rewards for certain types of spending. For example, a business travel credit card might offer 3x miles on travel-related expenses and only 1x miles on every other type of purchase. Another card might offer 2x points on software and 1x points on everything else.
So, how do you know if you’re getting a good deal on your rewards program?
Credit card points and miles vs. cashback
When considering whether to go with a miles or points-based credit card versus a cashback rewards program, keep in mind:
- Real dollar value
- Spending terms
- Redemption terms
Real dollar value
Points (or miles) are like an arcade game. If you spend money playing a game and eventually win a prize, you’ll find that the prize itself is worth far less than the money you spent to play the game.
Calculating the dollar value of a point usually isn't straightforward. The value of 1,000 credit card points, for example, can vary widely. Some programs offer a fixed dollar amount, like $10, while others offer a variable value, like more points for travel than merchandise.
Also, some programs let you transfer points to other programs, which can change their value. Some programs even have a tiered value system, where the value of points increases as more are accumulated.
With cashback credit cards, the dollar calculation is simple. The percentage of cashback specified by the card is the exact percentage of your purchases you earn back as a reward.
How to earn credit card rewards points
Points-based systems often offer higher rewards in certain categories, like SaaS or travel, incentivizing you to spend more in those areas.
Cashback programs are simple: spend money to receive a guaranteed percentage back. That money can then be used wherever you choose.
That said, there are other factors to consider when earning credit card rewards points, miles or cashback, such as:
- Signup bonus rewards: Many corporate card companies will offer an immediate signup bonus to entice new customers. These rewards often come with strings attached—a required amount of spending within a certain period of time. For example: “New business card users gain 10,000 bonus rewards points if they spend $15,000 within the first 3 months of the card being issued.”
- Spending at specific vendors: Certain corporate reward cards restrict the places where you can use them and still get bonus points, miles, or cashback.
- Spending on specific categories: Cards may limit or increase rewards by spending on noted categories.
- Spending time frames: To receive greater multipliers or the signup bonus, you may be required to spend a certain amount in a certain time frame.
- Earning points multipliers: Some will offer points multipliers to incentivize spending on specific vendors, categories, or time periods.
- Cashback on all purchases: More straightforward cashback programs allow you to earn cashback on all your purchases, no matter the vendor or spending category. Others may still specify which spending areas earn you the most cash back on credit cards.
How to redeem credit card rewards
Most credit card issuers offer several ways to redeem your rewards. These options typically include:
Statement credit: Cash back credit cards will typically apply your cash back earnings as a statement credit. Sometimes, other options include a check or direct deposit into your bank account.
Gift cards: Redeeming points for gift cards is a popular option offered by many issuers. This can include cards for a variety of retailers. Although it's a versatile redemption option, the value you get per number of points might be less compared to other methods.
Travel rewards: Travel rewards cards allow you to redeem membership rewards for travel purchases like airline flights, hotel nights, and rental car discounts. Some travel cards also let you transfer your points to hotel or airline loyalty programs, where the point values may be higher.
Shopping portals: Many credit card issuers have shopping portals available where you can use your points to purchase items from their partner retailers, like Amazon and Apple.
Donations to charity: Some credit card companies let you donate the value of your points to charitable organizations.
How to choose the most rewarding credit card for you
Every company is different in its spending needs. That’s why you’ll want to choose a corporate rewards credit card wisely before jumping into the one with the flashiest rewards policy. Sometimes, simple is better.
To summarize, here’s what you need to consider before choosing a corporate rewards credit card for your business:
- Real value: Points and miles are ’t always worth the spending they incentivize. Strive for a one-to-one cash value ratio to avoid overspending.
- Cashback terms: Some rewards policies require that you spend a certain dollar amount within a certain period, or wait a certain amount of time before the rewards can be redeemed. Always read the specific policy for its redemption terms.
- Spending flexibility: Points, miles, and cashback are not always applicable to every vendor or transaction. For example, if you rarely travel for work but are often buying certain industrial materials, you won’t benefit from a travel-heavy rewards program.
- Fees: Rewards sometimes accompany cards with high annual fees or interest rates—always consider other benefits of the business credit card instead of just looking at its rewards program. Sometimes, the costs outweigh the perks.
Are credit card rewards worth it?
Whether credit card rewards are worth it depends on your spending habits and how you use the rewards. If you pay off your balance in full every month and can use the rewards without incurring fees or carrying a balance that accrues interest, then credit card rewards can be a valuable perk. However, if you find yourself spending more just to earn rewards or carrying a balance that leads to interest charges, the cost may outweigh the benefits of the rewards.
Keep your eye on the prize, not the points
Ramp is a corporate rewards card with clear cashback and full flexibility. Our cards offer 1.5% cash back on purchases along with free expense management software.
With our platform, every expense is automatically accounted for, matched to its receipt, and logged in your general ledger—simplifying accounting for your cashback rewards.