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Are Credit Card Reward Points Worth It?

Lauren Bowling4-minute read
September 21, 2020

It can be hard to resist the temptation of signing up for a fancy card with cash-back or airline mile rewards. After all, as competition among card companies continues to increase, the sign-up incentives only become more enticing.

But it’s important to remember no matter how good the sign-up bonus, you’re still signing up for a credit card, and the potential for more debt.

Below is a crash course in everything you need to know to determine if credit card reward points are really worth the time, effort and potential debt.

What Are Credit Card Points Good For?

There is a credit card reward program that allows consumers to redeem money spent (or “points”) for just about anything, including:

  • Cash back (either on your statement or via check)
  • Gift cards
  • Miles for popular airline rewards programs
  • Hotel stays
  • Gas

The way credit card points work, in a nutshell, is that you spend with the credit card and then you get “rewarded.” Reward structures vary from card program to card program.

What Are Reward Points Worth?

Generally, programs offer a basic reward per dollar spent, along with the aforementioned sign-up incentives, and bonuses when consumers spend in certain categories, hit certain spend limits, or spend with certain partners.

To figure out how much your rewards are worth, it’s important to read the fine print of the cardholder agreement and do some basic internet research. Most cash-back rewards cards offer 1% back on spending, which is a penny per dollar spent. There’s the potential to earn more than a penny per dollar when utilizing non cash-back programs such as those that offer airline miles or points-per-spend.

But there’s more that goes into the “worth” of your rewards beyond what you get when you spend. Be sure to factor in any annual fees as well as the interest rate on the card. Because credit cards come with high APRs, carrying a balance on a card could render your rewards worthless.

For example, you have a rewards card that offers 1% cash back on all purchases. If you spend $20,000 that year on the card, you’ll get $200 cash back. But if you carry even a $5,000 balance month to month at a more competitive interest rate of 17% you’ll spend $438 in interest for the year, rendering your rewards at less than zero. Yikes.

So, Are Credit Card Miles Worth It?

Serious reward point “travel hackers” prefer airline miles because these offer a better bang for your buck. For example, if a card offers 1% cash back, that means cardholders earn 1 cent for every dollar spent. According to a 2019 Value Penguin study, the average value of each airline mile is 1.3 cents, meaning your money goes further when trading dollars for miles.

There are many drawbacks to card rewards, however, and airline miles reward programs in general. All credit cards come with high APRs, and some with a costly annual fee. However, airline programs also come with expiration dates (meaning you have to use your miles by a certain date), stipulations on when and how you can use the miles, and inconvenient blackout dates (meaning you can’t travel when you really need to, like during the holidays).

Is the money saved worth the inconvenience? It really depends on how much you and your family travel in a given year and how much you typically spend on that travel.

Do Credit Card Rewards Make You Spend More?

There is little hard research to suggest credit card rewards make consumers spend beyond their means. A 2010 research report from the Federal Reserve Bank of Chicago found that rewards programs did make consumers spend more on that card, but that total spending across all cards decreased in order to compensate.

Likely, this increase in spending on the rewards card is for card users to hit spending limits in order to qualify for lucrative reward card bonuses that incentivize people to sign up for rewards programs in the first place. Here’s how to evaluate if a sign-up bonus is good for your situation: 

  • It’s important when evaluating card programs (especially those with flashy sign-up bonuses) to write down what you’d need to spend to qualify ($1,000 over 90 days, for example).
  • Make note of any annual fee.
  • Look at your current spending habits on a monthly basis to determine if you, and your family, can reasonably hit that spending limit in the time period allotted without overextending yourselves and taking on debt.

When Credit Card Rewards Make Sense

Credit card rewards aren’t evil. And when utilized properly, they can help your family afford exclusive travel and experiences. But before signing up for a card just for the rewards, it’s important to answer the following questions:

  • How much do I reasonably spend each month?
  • Am I able to pay off the balance in full each month?
  • How often does my family travel?
  • How much does my family spend on travel in a year?
  • Do I have good credit? 

It’s worth noting here that “travel hacking” or “rewards hacking” is really a game for those with great credit. The most popular rewards cards with the best bonuses all require a credit score of at 670. You can get a rewards card with lower credit, but if you’d like to get into the rewards hacking game, it may be worth it to spend some time learning how to build credit or improve existing credit.

While diligent card hackers can earn thousands in rewards each year and some exclusive travel experiences, U.S. News reports the average cardholder earns about $300 in rewards each year.

Depending on the size of your family and the amount you travel, this amount may not be worth much, but if you utilize credit cards to handle day-to-day spending and then pay the balance in full each month, any cash back or miles accrued can be a nice year-end bonus.

For more credit card and personal finance articles, be sure to check out the Rocket HQSMLearning Center.

Lauren Bowling

Lauren Bowling is an award-winning blogger and finance writer whose work has been featured on The Huffington Post, Fox Business, CNBC, Forbes, Business Insider, Redbook, and Woman’s Day Magazine. She writes regularly at financialbestlife.com.