How Do Credit Card Rewards Work?

October 9, 2020

Due to the overly complicated nature of credit card reward programs, there are a ton of resources online trying to make sense of it all. And when navigating these credit card comparison sites and blogs, it can often feel like credit card rewards are one big game.

In a way, they are.

To better understand the reward points system, this comprehensive guide will take you through everything you need to know, including:

  • What is a credit card reward
  • Points and miles vs. cash back
  • How to choose the most rewarding card for your business

So, if you’re wondering “how do credit card rewards work?” our team is here to help.

What is a Credit Card Reward?

Simply put, a credit card reward is a perk that you receive for every dollar you spend through that line of credit. Rewards programs tend to be heavily advertised for personal cards, but they are available for both personal and business credit cards.

The three main types of rewards are points, miles, and cash back. That said, points and miles function similarly, allowing you to trade in those points (or miles) for redeemable rewards, such as:

  • Free or discounted flights, hotels, and car rentals
  • Gift cards to specific vendors
  • Discounts on expenses
  • Charitable donations

The way you gain these points or miles depends on the specific policies of the reward program, and each reward program will typically come with bonus rewards for certain types of spending. For example, a business travel 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 spend and 1x points on everything else.

Notice, however, that in offering these bonus multipliers, there’s not an easy way to evaluate the real value of the rewards program. Offering “bonus points” doesn’t paint a clear picture of the value you’re receiving—unlike 1.5% cash back, which presents a direct monetary value.

So, how do you know if you’re getting a good deal on your rewards program?

Points and Miles vs. Cash Back

Let’s say you spend $15,000 on travel expenses in one year. With your travel card granting you 3x miles on travel-related expenses, this nets you 45,000 miles. You then use these miles for two free tickets from New York to San Francisco and a 3-night stay in a hotel.

Is this better or worse than getting 1.5% direct cash back on all your expenses?

Instead of doing the math for yourself, can you see how points and miles “gamify” the rewards program?

When considering whether to go with a points-based reward program or a cash back-based reward program, keep in mind:

  • Real dollar value
  • Spending terms
  • Redemption terms

Note: Points and miles can be used interchangeably here.

Real Dollar Value

Points 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.

That’s why you need to calculate how much points are worth in dollars by dividing the cost of a redemption item by the number of points it requires. Factor in how much you have to spend to receive that many points.

With cash back, this calculation is straightforward. Whatever percentage you get cash back is what you earn for your purchases.

Spending Terms: How to Earn Rewards Points

Points programs will often dictate where you should spend by rewarding certain purchases over others.

Points-based systems often offer more rewards in certain categories, like SaaS, travel, etc., thus incentivizing you to spend more in those areas. These vendors or categories are often specifically defined in the policy.

Cash back programs are simple: spend money to receive a guaranteed percentage back. That money back can then be used in any vertical.

That said, there are other factors to consider when earning credit card rewards points, miles, or cash back, such as:

  • Signup bonus rewards – Many corporate card companies will offer you an immediate signup bonus to entice new customers. This often comes with strings attached—a minimum spend in a certain number of months. 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 – Corporate rewards cards may limit the spending areas or vendors in which you can spend to receive credit card rewards points, miles, or cash back.
  • 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.
  • Cash back on all purchases – More straightforward cash back programs allow you to earn cash back 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.

Redemption Terms: How to Redeem Credit Card Rewards

Many card providers require you to spend a certain amount or be an active customer for a year before you can redeem rewards. For that reason, you may be spending money to earn points that you can’t even use.

The best cash back programs will apply your cash back as a statement credit. Other programs, however, may place restrictions on the dollar increments, spending areas, or times that you can redeem your cash back.

That’s why you should always review the redemption policy on your rewards card—not all programs are as simple as they seem.

How to Choose the Most Rewarding 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 not always worth the spending they incentivize. Strive for a one-to-one cash value ratio to avoid overspending.
  • Cash Back Terms – Some rewards policies require that you spend a certain dollar amount for a certain period of time, or wait a certain period of time before the cash back can be redeemed. Always looks to the specific policy for the redemption terms.
  • Spending Flexibility – Points, miles, and cash back are not always applicable to every vendor or spending type. 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. Flexible cash back might be the better option.
  • Fees – Rewards sometimes accompany cards with high annual fees or interest rates—always consider other benefits of the card instead of just looking at its rewards program. Sometimes, the costs outweigh the perks.

While some companies might prefer the specific rewards offered by different issuers, others would much rather enjoy the instant value and flexibility of cash back. Ask yourself what’s better for the business: lounge access or liquid cash?

Keep Your Eye on the Prize, Not the Points

Points and rewards programs are never quite what they seem. Their dollar values can be disappointing, their redemption policies limited. That’s why the most dependable system is a corporate rewards card that offers clear cash back with full flexibility.

Ramp offers this and comes with a spend management platform built-in to the card. Which means, not only does the card provide 1.5% cash back on all purchases, but every expense is automatically accounted for, matched to its receipt, and logged in the general ledger. Staying organized can help you cut business expenses if needed and create a small business budget for future spending.

The savings are two-fold, and best of all, there’s no strings attached.

Choose the card that incentivizes you to save, not spend—with Ramp.

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