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How Credit Card Points & Miles Work

How Credit Card Points & Miles Work

*Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any credit card issuer. This site may be compensated through a credit card issuer partnership.

This article was last updated Dec 24, 2013. Terms and conditions may have changed. For the most accurate information, please consult the issuer website.

Credit card users can earn rewards in the form of points, miles, or cash back, depending on which card they use. For many cardholders, cash back will appear to be the most valuable option, especially when they don't understand the value of points and miles.

And who can blame them? It seems like every airline, hotel, credit card issuer, and sandwich shop has created its own complicated program to lure you in with the promise of free stuff. Although some believe that collecting points and miles is not worth the effort, others have found that these rewards can sometimes be far more valuable than cash back. But first, you have to understand the basics.

What are Points and Miles?

Points and miles are units of an artificial currency created by private corporations. Points and miles are given out to customers who participate in a company's loyalty program with the expectation that they can redeem these points or miles for awards.

Traditionally, airlines offered customers one mile for each mile flown, and most still do. But now, carriers like Southwest are calling their rewards "points," and some credit card issuers, such as Capital One, have started calling their rewards "miles". So for simplicity sake, let's just refer to all intangible, non-cash rewards as "points".

What are Points Worth?

There is one problem with thinking of points as just another currency; you can't freely exchange points with dollars. So even though you can look up the exchange rate between the British Pound and the U.S. Dollar, there is no agreed upon value for a Delta Airlines SkyMile or one point in Hyatt hotel's Gold Passport program. The value of a company's points depends on what you can redeem it for.

Sometimes, that value is easy to figure out. For example, miles in Capital One's Venture Rewards program are worth one cent each as a statement credit towards any travel expense. Pretty simple. On the other hand, a Delta SkyMile can be worth as little as one cent towards a ticket purchase (using their Pay With Miles option), or as much as five cents when used for an international business class award ticket at the lowest mileage rate. For instance, a business class ticket to Europe will require as little as 125,000 Delta SkyMiles, but if that ticket sold for $5,000 (and is worth that amount to you), then each mile was worth four cents each toward the award ticket.

That being said, there are some basic guidelines to help you determine what your points are worth. Most credit card points are worth about one cent each towards merchandise, gift cards, and travel reservations. Major loyalty programs that follow this general rule include Chase Ultimate Rewards, American Express Membership Rewards, and Citi ThankYou points. Furthermore, Chase will allow you to exchange Ultimate Rewards points for one cent each as cash back. On the other hand, American Express will only allow customers to be reimbursed for some purchases using their Membership Rewards points, so they do have cash-like value.

But when it comes to airline and hotel programs, all bets are off. Some points can be worth less than one cent each while others can be worth much more, depending on the program and how wisely the points are spent.

In some cases, points can be transferred from one program to another, so it helps to know how much each company's points are worth in order to maximize their value. Programs that allow point transfers include American Express Membership Rewards, Chase Ultimate Rewards, and the Starwood Hotels Preferred Guest program.

How do you Earn Points?

Part of the confusion about points stems from the myriad of ways they can be earned. Credit card holders can earn points from sign up bonuses and regular spending. In addition, bonus points are often available when making purchases through an online shopping portal.

If the points are from a third party program, such as one run by an airline or hotel company, then that company might offer points through dozens of other partners. Points can be earned through airline, hotel, or rental car reservations, dining programs, financial services, or just about any other transaction you can imagine. So it's worth taking a moment to browse your favorite program’s web sites and learn how to earn points.

What's the Catch?

If you can earn points in all sorts of ways, and spend them on all kinds of goods and services, what can go wrong?  First, the company that issues the points owns them, not the customer. That means that if you cancel a credit card (or the card issuer cancels your account) you will lose any points earned in a program operated by the bank(you will not lose any airline or hotel points).

Additionally, companies can and do change their program any time they feel like it, and the vast majority of these changes are negative for the customer. For instance, Delta announced that they would require more miles for an award than previously established. They did this twice in recent months, and the changes took effect without any advanced notice, drawing ire from their customers. In the hotel industry, Hilton, Hyatt and others chains also raised the price of awards in 2013.

Serious collectors of points refer to these changes as program devaluations, as it effectively reduces the value of the points they have already earned, kind of like runaway inflation. But you don't have to employ fancy economic terms to appreciate that companies are just moving the goal posts in the middle of the game – because they can.

Bottom Line

 Anyone who earns reward points from a credit card, airline, or hotel needs to know the basics about how these programs work. But once you understand what points are worth, and how to earn them, you can make the best decision when it comes to earning credit card rewards. And who knows, the future of currency may include credit card rewards.

*Editorial Note: This content is not provided or commissioned by the credit card issuer. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by the credit card issuer. This site may be compensated through the credit card issuer Affiliate Program.

*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.

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