Credit Card Rewards

How Credit Card Rewards work

Rewards credit cards offer rewards in three ways and take away rewards in two. The most visible reward is the bonuses granted in the first three to six month if a member reaches a designated level of spending. The second way to accumulate points is per dollar through normal spending, and with many cards those rewards are increased by a factor for specified vendor categories. 

For example, travel rewards cards often incentivize members with richer rewards on hotel and airfare, whereas a business credit card may well include office supplies as a bonus spending category. Some credit cards offer rewards which don't fit into the first two molds and are better described as perks. These include cardholder benefits like entry into an airport lounge or paid TSA PreCheck screening fee. The value of these perks vary greatly based on cardholder habits and ability to use these benefits. 

We encourage you to bear in mind the way credit cards take away benefits. High annual fees can offset rewards if you are not in the position to use the rewards you gather or to spend enough dollars on the credit card to reach a meaningful accrual. The second way you may find your rewards eroded is through exclusions which limit your ability to use your rewards for things you actually want.

The card rewards calculator

Our credit card rewards calculator is designed to give you a short summary to help you compare a list of popular credit cards in a minute. We have highlighted a few important numbers which describe 1) the maximum first-year bonus you can expect, 2) the major airlines and hotels where you can redeem your points, and 3) the rewards accumulation you can expect based on your own typical spending. 

In order to model these cards we have cataloged the offers for each credit card and computed the rewards from dollar amounts you can adjust to match your scenario. We call it "Estimated rewards based on spending", and it is just that - an estimate. Your actual results may vary so consider this a starting point and rely solely on the card contract to base your financial expectations.

Let's review how we break down estimated rewards based on spending.

A typical rewards card will offer 1 point per dollar that you spend on the card. Some of those cards offer most points per dollar when you shop certain categories of goods and services. For example, a credit card may offer 3 points per dollar spent on dining. As a FIRE practitioner, you may largely avoid spending money on dining, so that doesn't interest you and you move on to a different card. An airline-branded might offer 5 points per dollar spent when you book travel through the airline, which could result in a huge value if you often fly with that carrier. 

In order to get a sense of how your budget plays against these credit card designs, we created a “budget calculation” to value potential rewards based on your personalized spending. 

First, set your ballpark monthly spending under the Calculate section of our tool. Then, divvy up your spending broadly based on categories of vendors. Once you have allocated your projected spending, you will find some cards offer higher rewards based on your scenario. These are cards you will likely want to consider in more depth. Your next step is to look at exclusions to make sure the bonus structure and vendors actually fit within your habits. For example a card which offers a high bonus for groceries may exclude certain grocers, the same should be assumed of dining, airlines, and hotels. Keeping these details in mind you can soon narrow your focus to the offers which are most beneficial for your purchase pattern. 

We do not recommend using this tool, or taking out new credit cards if you struggle with spending or debt issues. If you are currently experiencing debt issues, please see our posts on borrowing and debt avoidance. We hope this tool will help you determine which credit cards would be best for your needs, habits and spending. As frequent travelers, we’ve enjoyed many of the perks of credit card rewards programs and hope you will do the same!