How do credit card rewards work?

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This article is part of our guide to business credit cards.

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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.

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

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How credit card rewards work

A credit card reward is a perk that cardholders receive for every dollar spent through that line of credit. Credit card rewards programs tend to be heavily advertised by credit card issuers for personal cards, but they are also available for other types of credit cards like business credit cards.

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

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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 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 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% cashback, which presents a direct monetary value.

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

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Credit card points and miles vs. cashback

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 cashback 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 cashback-based reward program, keep in mind:

• Real dollar value
• Spending terms
• Redemption terms
  

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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 cashback credit cards, this calculation is straightforward. Whatever percentage you get cashback is what you earn for your purchases.

How to earn credit card rewards points

Points programs will often influence spending habits by rewarding certain purchases over others.

Points-based systems often offer higher 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.

Cashback 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 cashback, such as:

• Signup bonus rewards – Many corporate card companies will offer you an immediate signup bonus to entice new customers. Credit card companies will also likely require a certain minimum credit score to qualify for these membership rewards. These rewards often come 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 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 cas back on credit cards.

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

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

How to choose the most rewarding credit card for you

Every company is different in its spending needs. Retailers may need to spend more on raw materials, whereas field service companies are likely to spend more on travel purchases. 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.

There are many different card options out there, from traditional cards like Citi, American Express, Capital One, or Visa, to cards more oriented specifically towards business needs like Ramp. 

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.
• Cashback 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 cashback rewards can be redeemed. Always look to the specific policy for the redemption terms.
• Spending flexibility – Points, miles, and cashback 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 cashback 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 cashback. 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 cashback with full flexibility.

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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% cashback on all purchases, but every expense is automatically accounted for, matched to its receipt, and logged in the general ledger (which simplifies accounting for your cashback rewards). 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.

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