How Credit Card Rewards Work: Points, Cashback, and Pitfalls

Credit card companies love to market their rewards as free money. Spend like you normally would, they say, and we’ll toss in travel perks, gift cards, or cash. And sometimes that’s true. But most of these programs are designed with one goal: to get you to spend more.

Here’s how credit card rewards actually work—what’s good, what’s not, and where people get tripped up.

Points-Based Rewards: The Game of Conversion Rates

With points programs, you typically earn 1 to 5 points per dollar spent, depending on the category and card type. Travel cards are notorious for offering extra points on flights, hotels, or dining.

But here’s the catch: a “point” is not a dollar. Depending on how you redeem them, the value of a point can vary wildly—from less than half a cent to over two cents.

For example:

• 10,000 points might be worth:

  • $100 in travel booked through the card’s portal

  • $70 as a statement credit

  • $50 in gift cards

  • Or just sit in your account, unredeemed, forever

Points programs reward those who optimize their redemptions. If you just hit “redeem for cash,” you're probably getting a bad deal.

Cashback: Simple and Predictable

Cashback is cleaner. You earn a set percentage back on your purchases—usually 1% to 2%, with bonus categories offering 3% to 5%. Some cards rotate categories (gas this quarter, groceries next), while others have flat rates across the board.

It’s straightforward, but not all cashback is equal. Some cards impose:

• Minimum redemption amounts (e.g., $25 before you can cash out)

• Delayed access to your rewards

• Cashback in the form of “points” that only redeem at specific retailers

So yes, it’s called “cashback,” but sometimes it's more like “store credit.”

Signup Bonuses: Fast Wins, Fine Print

Many rewards cards offer flashy intro bonuses like “Get 20,000 points if you spend $1,000 in the first 3 months.” These are real and often the best value you’ll get from a card. But beware:

• Miss the deadline or minimum spend by even $1? No bonus.

• Some bonuses are only for new customers, and you may be ineligible if you had the card before.

• Hitting that spend threshold could push you to buy things you wouldn’t normally buy.

If you’re going for the bonus, make sure it aligns with your actual spending habits—not aspirational ones.

The Pitfalls: Where It All Falls Apart

Rewards programs are profitable—for the banks. That’s because many people:

• Carry a balance and pay interest that far outweighs any rewards earned

• Overspend to chase points and bonuses

• Forget to redeem or redeem at poor value

• Ignore fees—that “free flight” may cost you $120 in annual fees

And when interest rates hover around 20%, even a 5% cashback reward becomes irrelevant if you're not paying your full balance.

Smart Strategy: Use the Card, Don’t Let It Use You

To truly benefit from credit card rewards:

1. Pay in full every month. No exceptions.

2. Pick rewards that match your lifestyle—don’t change your habits just to earn points.

3. Understand the redemption rules before you start racking up points.

4. Watch for fees, especially foreign transaction and annual fees.

5. Track your rewards so they don’t expire or sit idle.

Used correctly, rewards can be a nice perk. Used carelessly, they’re just another reason you’re spending more than you meant to.