How do reward credit cards work?

How do reward credit cards work?

By Matt Fernell, Editor-in-Chief at Published 8th April 2024.

Matt Fernell

A rewards credit card can help you earn cashback, points, or air miles when you spend. Here’s everything you need to know about how they work.

What is a rewards credit card?

When you spend with a rewards credit card, you'll earn cashback paid to your account, points that can be used at various retailers or air miles that you can use to get money off the cost of flights.

There are a few types of rewards cards that offer slightly different perks and benefits, but they all follow the same basic principle: the more you spend on the card, the more rewards you earn. 

With a rewards credit card, it's possible to accumulate £100s worth of points, although you need to use the card correctly and follow the rules for it to be worth it. 

How do rewards credit cards work?

Reward cards work the same way as most other standard credit cards - you'll have a credit limit on your card and an APR that details the interest rate you'll have to pay if your balance isn't paid off in full each month. 

The main difference is that you earn cash or points every time you use them. 

Reward credit cards usually require you to have a fair or good credit rating to be approved for one. They may not suit you if you have a poor credit history.

If you have a poor credit history and want to get a rewards card in the future, a credit building card may be helpful. When you use credit building cards and keep up with your repayments, it can help to improve your credit report

An example of earning rewards

Here’s an example of how earning points with a rewards credit card can work:

  1. You get a rewards credit card that offers one point for every pound you spend in selected retailers

  2. You use your card to purchase clothes from a retailer for £150 and earn 150 points

  3. Each point you earn has a value of 1p, meaning you've got £1.50 worth of points from the purchase 

  4. Once you've earned enough points, you can redeem them via your credit card account online or via an app

  5. You can either get money off vouchers you use at a check-out, or you may be able to pay with your points directly from your card

  6. Within a month, you then pay back the balance of £150 that you've borrowed from your rewards credit card to clear the balance 

If you don't repay what you've borrowed within a month, interest will be applied to your balance. The longer you leave your balance unpaid, the more the interest will build up, increasing the amount you need to repay. Accruing interest on your balance can quickly wipe out any benefit you get from earning points.

For example, you may have built up enough points over the year to get a £40 voucher at a specific store by spending £4,000 on your rewards card. However, if you don’t pay back the £4,000 borrowed on your card, you'll be charged interest, probably more than £40.

Some of the best rewards credit cards will also have annual fees. You'll need to pay these costs each year to keep the account open. These fees can range from £25-£150 a year. 

To make your card worth it, you'll need to use it enough to build up rewards greater than these fees; otherwise, you'll lose out. 

What are the different types of rewards credit cards?

Knowing the differences between rewards cards can be beneficial in helping you pick the card that suits you and your spending habits. 

Points rewards cards

These are rewards cards where you earn points when you spend. The more you spend on the card, the more points you get. These points can then be used in-store or online to get money off your next purchase or converted into vouchers. 

Where you spend your points card may dictate how many points you get. You may get more points when used in some stores than if spent elsewhere. Many of these cards offer loyalty points for certain supermarkets, for example, Clubcard points for Tesco or Nectar points for Sainsbury’s. 

When getting a points reward card, check where the points are accepted. The card may not be right for you if it can only be used at stores or restaurants where you don't shop often. 

Cashback cards

This type of reward card is similar to a points card; however, you'll earn cash that's taken off your balance instead of earning points. You'll earn a small percentage of each transaction you make. 

You may need your card for a year before your cashback is applied to your balance. You also need to check the terms carefully, as cashback cards often come with introductory periods where you can earn more in the first few months after getting the card. For example:

  • 5% cashback on purchases in the first three months

  • 1% cashback on purchases after that

This means it’s worth trying to maximise your use of the card in the first three months to make the most of the offer. You may also need to spend a certain amount to get better cashback, e.g. earn 5% when you spend more than £1,000 in the first month.

If a cashback card sounds right for you, you can learn more about cashback credit cards here.

Airmiles cards

These types of reward cards are usually run in association with airlines. When you use them, you'll build up points which can be used to get money off flights, hotel rooms, and car hire when you travel abroad. You can also access perks like airport lounge access and airport connections. 

There are two main points schemes, and most airmiles cards will earn you points for one or the other:

  • Avios

  • Virgin Atlantic

Each scheme can help you get rewards and discounts with different airlines, so look into what each scheme offers to work out which is right for you.

How to manage a rewards credit card

To make the most of a rewards credit card, follow these tips:

  • Choose a card that offers rewards you will use - e.g. get an airmiles card if you travel frequently

  • Work out what rewards you could earn based on your current spending and make sure the cost of any fees is worth it

  • Check the terms carefully to see the requirements for earning rewards; for example, you may need to spend a certain amount in the first month

  • Use your rewards card for your everyday spending to maximise your chances of building up your rewards

  • Make sure you pay off your balance in full every month to avoid being charged expensive interest

  • Set up a direct debit to make your card payments, ideally to clear the balance in full

  • Don’t use the card to spread a large payment or do balance transfers unless it offers a 0% interest period

  • Avoid missing a payment, as this could incur a fee, or you could lose your rewards

The information provided does not constitute financial advice, it’s always important to do your own research to ensure a financial product is right for your circumstances. If you’re unsure you should contact an independent financial advisor.