This is part 1 of a personal series that will take you through the ins and outs of credit card reward programs and how to get the most value out of every single dollar you regretfully spend.
Our mission at Birch is to create an all inclusive digital wallet that puts the power back in the hands of you, the consumer. And the first step to do this is to start with rewards.
Now that you've made it through the first two paragraphs, you're either confused and/or genuinely curious as to how these rewards program work. If you're confused, that’s ok, so was I when we first started figuring these out. But, good news. I’m decently OK at this stuff by now. (At least I think so). Over the next few weeks I will divulge all the deep and dirty secrets the credit card companies don’t want you to know and all the hacky ways to get the most value out of your cards.
What the heck is a credit card reward program?
If you know this already, feel free to skip this part. For those of you that are new to this world, a credit card reward program is a loyalty program that the credit card companies have thought up to encourage you to spend more on their cards by incentivizing you with neat things you can earn – like free flights, hotels, electronics and more. And why do they need to incentive you? Well, with over 1000 credit cards available for you to apply for at any given time, you most likely have a few cards (the average person has almost 4) and get an insane number of spammy promotions. The credit card companies are competing for their share of your wallet spend – because the more you spend on their cards, the more money they make.
Sounds great, right? Well, it was until each credit card company made their programs more and more crazy to cater to thousands of people. They started coming up with new schemes to get you hooked but also royally screw you by not being transparent. And now we have things like reward earning caps, online deal enrollment and rotating categories.
But I digress. At the end of the day if you’re able to manage your finances properly and not go into debt, you can get a lot of value out of your everyday spend. And when the credit card companies compete, you win.
If there is one thing you should always remember, it’s that no matter how good a deal actually sounds the credit card issuers are very, very good at figuring out the best way to make money from these programs and keep you feeling happy while getting the least possible value. Question every promotion that comes in an envelope, email or Facebook ad.
Well… how does it work?
I always begin by explaining the types of rewards. As we go through this short series we will get into each of these components more in depth, and we may even get fancy and add some math into the mix.
There are three types of rewards – cash back, points or miles. Points and miles are basically the exact same thing, except an airline might like to issue you “miles” to feel special whereas your bank (like Citi) may issue you points.
Cash back is a % of your purchase you get back in the form of… cash. So, if your card offers you 3% cash back on groceries and you spend $100 at your local supermarket, you’ll get $3 in rewards! Neat.
Points and miles are most always some sort of multiplier. Your card might earn you 5 points for each dollar spent on gas (5x) which means that if you go to Shell and fill up for $30 you would earn 150 points. All cards have specific exclusions within certain categories that don’t actually earn you rewards, but they are usually pretty clear cut.
It is. Sort of. Just make sure to keep in mind that 150 points on Card A may be worth less than 100 points on Card B. These are based on valuations, and we’ll dive deeper into this concept when we talk about redeeming rewards.
How do you snag yourself some rewards? There are a few ways:
1.Sign up bonuses: These are rewards that you get for simply opening up a card and meeting some sort of sign up requirement (usually an amount spent in a period of time). These can be both really good or really misleading and I’m dedicating an entire post just to these bonuses.
2.Category triggers: Gas, groceries, dining, utilities, car rentals, flights, hotels - the list goes on and on. These are unique per card but offer you an earning multiplier when you make a purchase that falls into one of these categories.
3.Merchant triggers: Think “Target” or “Starbucks”. These are bank <--> merchant partnerships where the bank can offer you a bonus for shopping at a specific retailer or store.
4.Other bonuses: Annual bonuses based on spend or loyalty, multipliers for redeeming your rewards into that bank’s checking account, increased rewards for making a minimum number of purchases within a period of time or other funky quirks.
As a side note, we track these for every individual credit card when you link your cards to Birch.
Now we get to the fun part. But it’s also the most awfully difficult and confusing part of the game. Most likely you’re thinking “No, Alex, you’re wrong. In fact, I just used my rewards for a round trip flight a couple of months ago. This is easy.” And I’m over here like:
But here’s the thing. You probably have no problem finding a flight or hotel that’s within the number of rewards you have in your account, you’re just not going to get the best value. Remember when I brought up the word "valuation" before? Valuations are how much your points or miles end up being worth when you convert them from a digital speckle to real tangible things. As an example, take a look at the following JetBlue flight:
In dollars, this flight from SFO -> JFK would cost you $277. But if you use your points it would be 19,500 + a $5.60 tax.
So you end up getting around $271.40 worth of flight for 19,500 points. In other words, you get around 1.4 cents per points when you redeem for this flight.
This is technically the same thing as 1.4% cash back on purchases but you've used it for a flight. Now get this - the JetBlue credit card earns 2x points on groceries & restaurant and 3x points on JetBlue. So now you effectively get 2.8% cash back on those categories and 4.2% cash back on JetBlue purchases. This can be rad and add up super quick. I’m also dedicating a whole post to these sorts of strange valuations because these values change constantly and for all different sorts of reasons.
Sorry for that tangent, let’s get back to the real matter at hand. Redeeming & How To. Here’s a quick overview of how it works:
After you earn enough rewards you get to choose what you want to spend them on. The top 6 ways to spend are on flights, hotel stays, car rentals, gift cards, electronics or merchant credit. The list extends to things like magazine and newspaper subscriptions but I highly recommend redeeming rewards for the things that give you the highest value.
Now, what makes these redemption choices so complicated is that their values are all different. Not only are they different for the same card, but they change across cards as well. You might be able to redeem your Starwood points for hotels at $.035 per point and gift cards for $.07 cents per point, but Amex might be hotels at $.01 per point and gift cards at $.03 per point. If you’re doing the math in your head right now to figure out which card has the highest value, don’t forget to add in earning multipliers 😊
Other Ridiculousness to Worry About:
These don’t necessarily impact your rewards, but they’re kind of important to think about:
-Perks (like concierge booking service, free checked bag, etc)
-Interest rates (introductory and ongoing)
And, uh.. That’s about it for now. I hope for those are you that are new to this space, this gives you a good starting point.
Did I miss anything? Send us an email at firstname.lastname@example.org