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Sep 28, 2019 3:16 PM ET

How Different Credit Card Reward Points Work

iCrowd Newswire - Sep 28, 2019

Reward points and cash back have become the most important loyalty tools that large consumer facing companies utilize.  While rewards points are used across all industries (think Starbucks points), the travel and credit card industries are still the biggest promoters of loyalty points and cash back.

Many people have also become aware of reward points from the movie “Up in the Air” starring George Clooney where he was focused on earning airline and hotel points.  Despite the sad nature of the movie, the concept of earning free travel became better known in the country.


Airlines were one of the first business categories to use loyalty points in a significant way.  American Airlines launched their program in 1981.  Airline point are referred to as “miles” as they were initially based on miles travel (some programs still base on miles) even though they have now transitioned to dollars spent.

The reward program often generate significant profits for the airlines as they sell miles to credit card companies, retailers, rental car companies, and hotel chains.  The industries buying miles from the airlines offer them as rewards to their customers.

Miles can be redeemed for free airfare and collecting miles also provides the opportunity to earn elite airline status.  True frequent fliers, those who spend $20,000 or more on airlines, also have the opportunity to earn elite status which comes with seat upgrades, the ability to change flights, and free drinks.

The ability to earn miles through so many channels and redeeming for free flights and benefits makes airlines miles one of the best perceived reward points for a consumer to collect.


Hotel reward-loyalty programs followed airline programs but did not hit their stride until the 90s or 00s.  In fact, many hotel programs were considered just opportunities to earn airline miles.  Now in the 2010’s (do we call that the “teens” now?)  hotel reward program are considered a valuable tool for consumers to earn free hotel nights, plus a host of additional benefits (better internet, free breakfast, room upgrades, etc).

Hotel programs compared to airline programs do not have as many point earning opportunities.  Typically, the only way to earn hotel points is either at the hotel, with a hotel branded credit card, or with a prestige credit card (think $450 fee).

Hotel points sometimes offer more perceived value to customer.  Depending on the hotel program it is not unusual to be able to turn 7,500 points into a $150/night hotel room.  An additional kicker is that a room booked with points also avoids the sales tax rates that are now often 15%.

Credit Cards Reward History

In 1980 the concept of a credit card that earned rewards was practically inconceivable.  The only credit cards available typically had an annual fee of $20 with a 19.99% interest rate.  Consumers who wanted any prestige with their card had either an American Express or Diners Club card that had a $45 annual fee and was a charge card that requires payment in full at the end of the month.

Credit cards without rewards started to end in 1985 with the launch of Discover that offered cash back.  The next combination came with airline reward cards that launched in 1987.

Airline Cobranded Credit Cards

Credit card reward and loyalty card really “took off” when the industry teamed with airlines.  Airline cobrand card prominently display the airline name on the plastic with the bank name and association receiving less space on the card.  Typically, a consumer will often refer the card as their “United Card” not as their “Chase” or “Visa” card.  Airline cards have been a great benefit for the banks issuing the cards.  The banks have found that customers who get airline cobrand (actual industry term, although not marketed) cards are:

A consumer that wants to earn as many airline flights as possible really needs to have an airline credit card in their wallet.  The airline card the customer holds should be for the airline serving their home airport or a location they like to visit.

Most airline credit card are offered with a fee. There are some that do not have a fee, but I do not recommend as those cards only earn miles at half the rate

A base airline card typically has an annual fee under $100 and for that you receive reward benefits (1 mile per dollar spent that combines with the points on earned the airline), one piece of checked luggage for free, and early boarding.  Given that airlines charge $25 per bag it often only takes two roundtrip flights to pay for the annual fee.

A prestige airline card typically has an annual fee around $450.  The prestige card comes with additional benefits including:

Lastly, at sign up, the credit card companies often offer sizable sign on bonuses.  The bonuses can be 60,000 miles or more, often good for at least two round trip flights within the USA

Hotel Cobranded Credit Cards

Based on the success of airline cobranded reward cards it was only natural that the airline travel counterpart, Hotels would have cobranded credit cards.

Similar to airline cobranded cards hotel cobranded cards offer the ability to earn points that can be redeemed for stays.  These points really have become more valuable as hotel prices have increased.  Hotel prices of $200 per night are common and rates in excess of $400 per night are not unusual.  Having a credit card that earns hotel points is a valuable way to save money for any traveler.

Hotel cobrand cards usually carry an annual fee under $100. The benefits of the card often include a free night or loyalty program status.  Earning higher status is valuable as it often includes items such as:

In short, selecting a hotel branded cobrand credit card in conjunction with earning points directly at the hotel can be incredibly valuable to a consumer.

No Cobrand Reward Credit Cards

Banks crave customers who are loyal, have significant monthly spending, and are low credit risk.  While banks have gotten these customers through airline and hotel cobrand cards, what they do not like is paying a premium to the airline and hotel companies for the airline and hotel company loyalty points.  Further, the banks purchase the airline and hotel points for the customer and place the points into a customer’s account monthly.  Once the points are with the hotel or airline the bank cannot get the points back regardless of what happens with that customer.

Due to the high expense of airline miles and hotel points banks have launched their own loyalty programs to reduce expenses while maintaining customer loyalty.  Banks have created their own reward points that can be redeemed for travel, merchandise, gift cards, and cash.  In addition, banks offer cash back credit cards as many customers still go by the adage “Cash is king”

Elite Reward Credit Cards

Banks like elite cards because they charge the highest annual fee on them and they are able to collect the highest interchange rates from merchants on these cards.  The annual fees are typically $450 or more, needless to say the $450 goes straight to the banks bottom line.  In addition, if the earned points are not used there is no cost to the bank.

The elite card is branded primarily with the bank name.  The bank does not need to limit an elite card offer to just someone who flies a specific airline or stays at a specific hotel brand which gives the bank the ability to make a desirable offer to a wider range of consumers.

Banks are targeting many of the same customers being targeted with hotel and airline cobranded cards.  Customers who get elite cards still fit the airline-hotel cobrand customer description:

However, with such a high annual fee there is great benefit for consumers.  Banks justify elite cards by offering outstanding benefits.  These benefits include:

The points are typically valued at a rate of 100 points per dollar and can be redeemed for straight cash.  However, the greater value comes when redeeming for travel.  Banks offer with their elite cards:

Premium Reward credit cards

Premium reward cards are similar to elite reward credit cards but are offered at a lower annual fee, typically less than $100.  The cards still offer reward points and the reward points can be redeemed for travel, merchandise, gift cards, or cash back.  Bonus points can be earned on travel spend, but is typically 2X points versus up to 3X points with the elite cards.  The cards will also typically not offer travel benefits such as airline lounge access.

While the benefits are not as great on a premium card as they are on an elite card the cards are still important and have much lower annual fees.  The sign on bonuses can be rich (50,000 plus points) and there are even some travel partners that points can be transferred to.

A customer who does not want to pay a $450 annual fee, but want great point earning opportunities and some travel benefits may find that a Premium Rewards credit card is the best card for their wallet.

Non-Premium Reward Credit Cards

Non-Premium Reward Credit Cards are the majority of all credit cards issued in the USA.  Often the customer for a non-rewards credit card is a less sophisticated financial person and traveler than the Elite, Premium, and Cobrand credit card customer.  Non-Premium Reward Credit Card customers are driven by:

While Premium, Elite, and Cobrand cards are typically issued by the largest financial institutions in the country (Chase, Amex, Citi, Bank of America, US Bank, and Cap One) non-premium reward cards are issued by all financial institutions including national banks, community banks, and credit unions.

Points Based Credit Cards

Point based credit cards allow the points earned to be redeemed to travel, merchandise, or cash.  Point earning rates are typically not as high as they are on premium or elite cards but there are still opportunity to earn double points.  The double point opportunities on these cards will be directed towards everyday spend (gas and groceries) that concerns the mass market consumer.  There are a few cards that will offer 1.5 points on everything or rotating categories with limits that earn 5 points.

New cards are typically offered with:

Points redemptions need to occur on the company’s reward website.  The points are typically valued at 100 points for a $1.  The reward site will allow the customer to purchase travel, gift cards, merchandise, or get cash back.  Banks typically promote the travel rewards as in order to reach that higher redemption product a consumer must continue to spend and upon reaching an aspirational goal, consumers become more loyal to the product.

Cash Back Credit Cards

Cash back credit cards are the most common credit cards available today.  Mass market consumers are still driving by the concept “Cash is King.”

Cash back credit cards work exactly like Reward Points credit cards, but instead of offering points per dollar spent they offer a cash back percent 1%, 1.5%, etc.  While the product is not as exciting (sexy) in terms of earning points to fund a vacation, the product is profitable for banks and strongly desired by mass market consumers.

The Bottom Line

There is a credit card for every credit qualified consumer.  Credit cards allow customers to save money if the customer takes advantage of the available offers.  While the “sexiest” opportunities are on cobranded or elite cards there is still an opportunity to save money with all cards.  Many consumers will find the 0% interest period the most compelling offer of a credit card and that is offered predominantly on base reward cards.


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