How do credit card points work? Tips for calculating and redeeming

Credit card rewards are incentives designed to encourage credit card spending. Rewards typically come in the form of points, miles, or cashback, which you earn by making everyday purchases with your card. Depending on the program, you can redeem those rewards for things such as travel, gift cards, or statement credits.

But not all rewards are created equal. Point values, redemption options, fees, and other fine print vary by card. Understanding how credit card points work can help you choose the right business credit card and get the most value out of it.

What are credit card points?

Credit card points are a type of reward offered by credit card companies to incentivize card spending. You earn points by making purchases with the card, and the number of points you earn depends on the card's rewards program.

Each card has its own rewards program with its own terms, including the number of points you earn per dollar spent and the types of rewards available. Think of points as the “currency” you earn, and the rewards program as the rulebook that decides how you earn them, how much they’re worth, and what you can redeem them for.

You can redeem points for a variety of rewards, such as travel, merchandise, gift cards, or cashback. Each credit card program has its own specific point values and redemption options.

How do credit card rewards programs work?

When you use a credit card, you can earn rewards based on your spending. These rewards are primarily funded by interchange fees (paid by merchants), as well as annual fees and credit card interest charges paid by cardholders.

The three main types of credit card rewards are points, miles, and cashback. Points and miles work similarly, allowing you to redeem them for a variety of options, including:

• Free or discounted flights, hotel stays, or rental cars
• Gift cards from select retailers
• Discounts on everyday purchases, like gas or groceries
• Charitable donations

So, how do credit card points work? The way you earn points depends on the specific credit card program. Many cards offer extra rewards for purchases in certain bonus categories. For instance, a business travel credit card might earn 3x points on all travel-related expenses, while another business card earns 2x points on software.

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Credit card points vs. cashback

Earning credit card points is like an arcade game. You spend money to earn a reward, but the prize may not always match the effort or cost. That’s why it’s important to understand the real dollar value of your rewards before choosing a points or miles-based card over a cashback card.

In general, credit card points are worth about 1 cent each, but the actual value can vary depending on the card and how you redeem your points. Some reward systems let you transfer points to travel partners, which can increase their value. Others have a tiered value system, where your points are worth more as you earn or redeem larger amounts.

Cashback rewards credit cards, on the other hand, are much more straightforward. The percentage of cashback you earn is the exact percentage of your purchases you earn back as a reward. If a flat-rate card earns 2% cashback, you’ll earn 2 cents for every dollar you spend, with no need to calculate point values or hunt for optimal redemptions.

Points vs. miles

The terms "points" and "miles" are often used interchangeably, but there are a few key differences to know:

Points:

• More versatile: Points are usually associated with a credit card issuer's rewards program, not a specific airline. This gives you more flexibility in how you redeem them.
• Multiple redemption options: You can often redeem points for flights, hotel stays, car rentals, merchandise, gift cards, or even cashback. Some programs allow you to transfer points to airline and hotel partners.
• Ideal for those who value flexibility: If you don't have a strong preference for a particular airline and want a variety of redemption options, points-based credit cards are a good choice

‍Miles:

• Earned through general or co-branded travel cards: Some credit cards earn miles that can be used across a variety of travel partners. Others are co-branded with a specific airline, such as Delta or United, and earn miles tied to that airline’s loyalty program.
• Redemption flexibility varies: General travel credit cards typically offer broader redemption options, including the ability to transfer miles to multiple airline partners. Co-branded airline cards, however, often limit redemptions to that airline and its partners.
• Ideal for frequent flyers: If you're loyal to a specific airline or alliance, a co-branded airline card can offer strong value, letting you earn miles quickly and redeem them for flights, upgrades, or elite status perks

How to calculate the value of credit card points

Calculating the value of your points is simple: Divide the dollar value of the redemption (like a flight or hotel stay) by the number of points required.

For example, if a $500 flight costs 20,000 points, your points are worth 0.025 cents each. That’s not a great return; you’d be better off paying cash and saving your points for a better redemption. Alternatively, you could redeem those same 20,000 points for $200 in cashback, which gives you a more typical value of $0.01 per point.

In many cases, the best value comes from transferring your points or miles to airline or hotel partners and booking travel through those loyalty programs. These redemptions often yield a higher return than cash or gift cards.

While many personal finance websites try to pinpoint the "right" value of points or miles across different programs, the truth is that valuations are often inconsistent and vary by redemption. As a general rule, try to match or beat the program’s baseline value to get the most out of your points.

Here's an overview of the latest valuations from three sources:

*Depending on the card

How much are credit card points worth?

The value of your credit card points depends on the specific rewards program and how you choose to redeem them. Though valuations can vary, here are some general benchmarks to help you understand what your points might be worth:

Cash value

If you use a cashback business credit card, 1,000 points usually translates to about $10, meaning each point is worth roughly 1 cent. In some programs, that could go up to $20 depending on the redemption structure.

Travel rewards

Points redeemed for travel, such as flights or hotel stays, can sometimes be worth more. For example, 1,000 points might be worth $12.50 toward a flight instead of $10 in cashback, depending on the program and how you book.

Statement credits

Some cards allow you to apply points directly to your balance as a statement credit. The value per point depends on the issuer, but it’s often close to or equal to the cash value.

Merchandise and gift cards

Many rewards programs let you redeem points for merchandise or gift cards. The value of 1,000 points depends on the retail value of the item or the face value of the gift cards available for redemption. In most cases, these redemption options are the least valuable.

How to earn credit card rewards points

Points-based systems often offer point multipliers on purchases in specific categories, such as 3x points on dining or travel, incentivizing you to spend more in those areas.

Cashback programs are typically more straightforward; you make a purchase and receive a fixed percentage of that amount back in cash, which you can spend however you’d like. That said, several other factors can influence how and how much you earn:

• Earn a signup bonus: Many business credit cards offer welcome bonuses to attract new customers. These usually require meeting a minimum spending threshold within a set timeframe. For example: “Earn 10,000 bonus points when you spend $15,000 in the first 3 months.”
• Refer someone: Credit card issuers typically offer referral bonus points for referring people to the card. These bonus rewards can add up, but there’s often a yearly cap on how many referrals you can make.
• Maximize spending categories: Some business credit cards earn heightened rewards on spending in defined categories, such as software, advertising, or office supplies. Take note of any monthly, quarterly, or yearly spending caps, as the rewards rate may drop after meeting it.
• Look for points-earning perks: Your business credit card may come with a yearly anniversary points bonus or bonus offers from supplemental programs. Programs such as Chase Offers and Amex Offers give you extra rewards when you opt in and shop with select merchants.
• Issue employee cards: Many business credit cards let you add employee cards at no extra cost. When your team uses their cards for business expenses, you can earn rewards on their purchases.

How to redeem credit card rewards

One of the biggest perks of using a rewards credit card is the flexibility to redeem the points, miles, or cashback you earn. Most issuers offer multiple rewards redemption options, each with its own pros and cons:

• Statement credit: With cashback credit cards, the issuer typically applies your cashback earnings as a statement credit. Other options might include a check or direct deposit into your bank account.
• Check or direct deposit: You can often redeem credit card points as a check or direct deposit into an eligible bank account. With most card issuers, this is usually free and fairly simple.
• 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 for your points might be less compared to other methods.
• T‍ravel rewards: Travel rewards cards let you redeem for travel purchases like flights, hotel stays, and rental cars. Some travel cards also let you transfer rewards to hotel or airline loyalty programs, where point values may be higher.
• Shopping portals: Some issuers partner with retailers such as Amazon and Apple, allowing you to use your points at checkout. While easy to use, these redemptions may not always offer the best value.
• Donations to charity: Credit card companies such as Discover let you donate your rewards to charitable organizations

How to choose the right rewards credit card for you

Every business has different spending habits, which means the best rewards credit card for one company might not be right for another. Before jumping for a card with the flashiest rewards, it’s important to evaluate how well the card aligns with your actual expenses. Here are the factors to consider:

Your business spending habits

First, make sure the card’s rewards structure fits your business’s everyday transactions. If you or your employees don’t travel much, a travel-focused card might offer less value than one that rewards spending in categories such as software or office supplies.

The value of the credit card points

Consider the real value of the rewards. Points and miles may sound appealing, but they’re not always worth the spending. A good benchmark is aiming for a 1-to-1 cash value ratio so you’re not overspending just to earn rewards. Also pay attention to cashback terms, as some programs have minimum spending requirements or waiting periods before you can redeem.

Annual fees and interest rates

Weigh the benefits of the business credit card against the card’s fees and interest rates. A high annual fee can easily cancel out the value of rewards if the card doesn’t fit your business needs. And if you anticipate carrying a balance, interest rates can quickly turn your rewards into costly debt.

Qualification criteria

Lastly, make sure you can qualify for the card you choose. Check your credit scores and credit reports to ensure your finances are up to par. You’ll likely need a good credit score to qualify for the best business rewards cards, or a FICO score of 670 and higher.

Spend smarter with the Ramp Business Credit Card

Unlike traditional rewards credit cards, the Ramp Business Credit Card actually encourages you to spend less, helping you save money you can reinvest back into your business. In fact, Ramp customers save an average of 5% a year across all spending.

All cards are linked to Ramp's modern expense management platform, which lets you set customizable spending limits at the card, vendor, department, or category level. You get real-time visibility into all your spending, along with automatic receipt matching and transaction logging, so every purchase is tracked and synced directly to your general ledger.

Ramp doesn't require a credit check or personal guarantee, relying instead on factors like your business revenues and cash on hand. You’ll enjoy flexible credit terms, unlimited virtual and physical cards, cashback on purchases, and smart controls.

Ready to learn more? Try an interactive demo and see what Ramp can do for your company.