Guides · The basics
How credit card rewards actually work
2 min read
Every rewards card makes the same basic promise: spend money, get some of it back. The details decide how much.
Where rewards come from
When you pay with a credit card, the merchant pays a processing fee on the sale, and part of that fee goes to the bank that issued your card. Card issuers use some of that money, plus annual fees and interest, to fund rewards. That's why rewards are usually higher on cards with annual fees and why they vary so much from card to card.
The three kinds of rewards
- Cash back is a percentage of what you spend, paid as a statement credit or deposit. It's simple: 2% back on $100 is $2.
- Points are an issuer's own currency. Their value depends on how you redeem them, from well under a cent each to several cents through travel partners.
- Miles are points tied to an airline or hotel program, worth the most when you use them for travel with that brand.
Base rates and bonus categories
Most cards pay a base rate on everything, often 1% or 1 point per dollar, and a higher rate in a few bonus categories such as dining, groceries, gas or travel. Some cards pay a flat rate everywhere and skip categories altogether.
Whether a purchase counts as “dining” or “groceries” isn't decided by what you bought. It's decided by how the merchant is classified, which we cover in How merchant category codes decide your rewards.
The fine print that changes the math
- Caps: many bonus rates only apply up to a spending limit. See Bonus caps.
- Activation: rotating categories often need to be switched on each quarter. See Rotating categories.
- Fees: foreign transaction fees can wipe out rewards abroad. See Foreign transaction fees.
Why the card you pick matters
With two or more rewards cards, the same purchase can earn very different amounts depending on which one you use. A $90 restaurant bill earns $0.90 on a 1% card and $3.60 on a card paying 4% at restaurants. Across a year of everyday spending, those small gaps add up.