SoFi

In some cases, the IRS (Internal Revenue Service) does consider credit card rewards taxable income and in some cases, they don’t tax earned rewards. Confused? Don’t worry: Read on to learn when credit card rewards are taxable income and when they aren’t.

What Are Credit Card Rewards?

To better understand how credit card rewards are taxed, it can help to know what credit card rewards are. When a consumer uses a credit card they may earn different credit card rewards, such as points, cash back, and airline miles.

Depending on their redemption value, these rewards can be worth up to hundreds if not thousands of dollars. Your cardholder agreement should outline the credit card rules for how to earn rewards using a specific credit card, as well as how to redeem them.

How the IRS Treats Credit Card Rewards

In some cases, credit card rewards are taxable; in other cases, no. Take a closer look at which types of rewards and in which scenarios credit card rewards are counted as taxable income by the IRS.

Rewards Treated as Rebates on Spending

Luckily, cash back rewards and other rewards like miles or points aren’t considered taxable income when earned by making purchases. The IRS considers these types of rewards as rebates, discounts, or bonuses rather than income.

The trick is that the cardholder has to spend a certain amount to earn a reward in order for the IRS to not classify the rewards as income. For example, if a new credit card offers $200 in cash back when the cardholder spends $2,000 within the first six months of opening their account, that $200 would not be considered taxable income.

Rewards Considered as Income

Certain rewards are considered income. The way to identify which rewards are taxable income is by looking at how they’re earned.

As mentioned previously, if someone spends money to earn rewards, those rewards won’t be taxed. If, however, someone is given a $150 gift card simply for signing up or referring a friend for a new credit card, that $150 is viewed as taxable income — because they didn’t spend any money to earn it.

When Are Credit Card Rewards Taxed?

Again, credit card rewards that aren’t earned through spending (such as some introductory bonuses) can count as income that the IRS will expect the cardholder to pay income taxes on. Some scenarios in which credit card rewards may get taxed include:

•   If you received a sign-up bonus simply for opening a credit card or account

•   If you earn a reward for referring a friend

When Your Credit Card Rewards Are Taxable

As briefly mentioned above, any monetary rewards that a cardholder didn’t earn through spending can be considered taxable income.

Let’s look at how this can work with two different credit card bonus offers. If a cardholder is offered $100 if they spend $1,500 in the first three months of having their account open and they spend enough to earn that bonus, that reward won’t count as taxable income. On the other hand, if a cardholder is offered a $100 gift card simply for opening their new account, they will need to pay income tax on the $100.

When Your Credit Card Rewards Are Not Taxable

As briefly mentioned above, credit card rewards aren’t considered taxable income if someone spends money to earn them. When a cardholder acquires the rewards (cash back, travel miles, etc.) through purchases, then those rewards are classified as a rebate or a bonus, not taxable income.

For instance, this may include:

•   Sign-up bonuses that require meeting a spending threshold

•   Rewards earned from credit card spending

•   Miles earned through travel

Are Business Credit Card Rewards Taxable?

It doesn’t matter if the rewards are earned with a personal credit card or a business credit card — the same rules surrounding income taxes apply.

Where business credit cards can affect taxes is when it comes time to take tax deductions. For example, if someone bought $2,000 worth of equipment for their business and earned $40 in cash back rewards doing so, they can only deduct $1,960 on their taxes. In other words, they can only deduct the net cost of business expenses, which cash back reduces.

How to Know If You Owe Taxes on Credit Card Rewards

It can be hard to keep track of how much taxes are owed on credit card rewards. If someone earns a bonus without having to meet a spending requirement, the credit card company might send the cardholder an IRS Form 1099: either a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned.

Whether or not you receive this form, however, you’ll need to report the bonus on your income taxes. To make doing this easier, it can be helpful to keep track of any bonuses not earned through spending. That way, if the credit card issuer doesn’t send a Form 1099-INT or Form 1099-MISC, you can still complete your taxes properly.

Reviewing old statements to look for statement credits in the form of cash back or other types of rewards can be helpful.

Recommended: How to Pay Taxes With a Credit Card

Avoiding Taxes on Your Credit Card Rewards: What to Know

To avoid taxes on credit card rewards, all the cardholder has to do is not seek out credit cards that offer bonuses for simply signing up for the credit card. If the rewards are earned through spending, they won’t run into any taxes, thus allowing them to pay less tax.

The Takeaway

In general, taxes only apply to rewards that don’t require any spending to earn. If you’ll owe taxes on your rewards, the credit card issuer typically will send a Form 1099-INT or Form 1099-MISC specifying the amount of income you’ve earned and will need to report.

Being smart about credit cards and their usage is about more than just rewards, however.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Are credit card cash back rewards taxable?

Only credit card rewards that cardholders receive without having to spend money to earn them in any way are considered taxable income. If a cardholder earns cash back for spending money using their credit card, it won’t count as taxable income.

Are loyalty points taxable?

If someone spends money to earn loyalty points (such as purchasing airline tickets), they won’t have to pay taxes on those points. If, however, they received the points simply for signing up for a credit card, that would count as taxable income that they’ll need to report.

Are credit card rewards reported to the IRS?

In some cases, yes, credit card rewards are reported to the IRS. When this happens, the credit card company might send the cardholder a Form 1099-INT or Form 1099-MISC specifying the amount of income they earned that they’ll need to report.

Do you have to pay taxes on credit card rewards?

Cardholders need to pay income taxes on credit card rewards they didn’t need to spend money to earn. If they had to spend money to earn a reward, such as cash back, that won’t count as taxable income.

Photo credit: iStock/Grayscale Studio

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOCC-Q224-1909077-V1

If you’re asked to insert or tap rather than swipe your credit card when you go to pay, you’re using a chip credit card. A credit card chip is a small gold or silver microprocessor that’s embedded in the card and intended to offer greater security for your transactions.

Credit card chips are growing dominant in the plastic payment market. These chips — sometimes known as Europay, MasterCard, and Visa (EMV) chips — comprised about 93% of global credit card transactions in the most recent year studied, though US usage was slightly lower at 87.2%. Overall, there are almost 13 billion cards with these chips in circulation. Read on to learn more about how the credit card chip works.

What Is a Credit Card Chip?

Credit card chips are small microchips embedded in the card that collect, store, and transmit credit card data between merchants, their customers, and participating financial institutions. Each time you use a credit card, these chips generate a unique code that can only be used for that transaction.

Chip credit cards date back to the mid-1990’s, when the three titans of card payment technology — Europay, MasterCard, and Visa — collectively rolled out the first chip-based credit card to the masses. Also known as EMV chips, credit card chips were introduced as a way to enhance payment security over the existing magnetic-strip credit cards.

Today, chip credit cards continue to grow in popularity. Contactless credit cards are another advancement underway.

Magnetic Strip vs Chip Credit Cards

Magnetic-strip cards hold data on the magnetic strip that appears on the back of payment cards. Because these strips hold all of a cardholder’s information needed to make a purchase, this type of card is an easy target for thieves.

With industry-wide concerns over data fraud linked to magnetic stripe cards, credit card companies turned to advanced computer microchips as a solution to credit card data security problems, using EMV technology.

Chip-based payment cards have a big advantage over magnetic-strip cards, as each card payment transaction generates a unique data code. Because the chip’s code is a “one and done” feature that disappears after the transaction is completed, even if data fraud criminals uncover the code, they can’t use it for future transactions.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

How Does a Chip Credit Card Work?

Chip credit cards don’t work on a standalone basis. Merchants who want to conduct card payment transactions need payment processing tools, like card terminals and mobile scanners, that are compliant with EMV chip industry standards.

•   When a consumer inserts a chip credit card into a payment terminal (unlike with a contactless payment), and follows the on-screen prompts to complete the transaction, the chip and the terminal exchange the needed data in an encrypted code.

•   That code is then used to transmit the transaction details to the acquiring bank, which quickly reviews the transaction.

•   After the cardholder’s financial data is authenticated and it’s determined the consumer has the funds to cover the purchase, the payment software may run fraud filters to further authenticate the user and the transaction.

•   Then, the transaction is approved by the acquiring bank (or declined if the consumer doesn’t have the funds to cover the purchase or if fraudulent activity is suspected). The appropriate transaction confirmation codes are relayed back to the EMV payment device in real time, thus concluding the transaction.

•   Assuming the transaction is approved, the embedded card chip transmits the approval to the cardholder’s bank, which releases funds to pay for the transaction and sends it to the acquiring bank.

•   The transaction is then settled by the merchant’s payment provider and deposited into the merchant’s bank account.

Types of EMV Cards: Chip-and-Signature vs Chip-and-PIN

If you are using an EMV chip card these days, you probably know that many retailers don’t require a signature or PIN. You just tap, wave, or insert the card, and you’re all done. Many of the major card companies did away with the signature requirement.

However, you may still have another step when you use your credit card, depending on which of the two main types of chip-based cards you have:

1.    Chip-and-signature cards: The most widely used form of EMV card in the U.S. is the chip-and-signature card. With these, the cardholder simply inserts the card into the point-of-sale terminal and then provides their signature to verify the transaction.

2.    Chip-and-PIN cards: With a chip-and-PIN card, the cardholder is asked to enter a four-digit PIN, or personal identification number, at the point of sale. That process authenticates the user and allows for the card transaction process to be completed.

While each type of chip-based payment card model serves the same function — the safe and efficient completion of a transaction — chip-and-pin cards may be the safer alternative.

That’s because with a chip-and-signature card, the cashier or front of the store service provider may not ask to see the back of the card to manually authenticate the signature. That gives fraudsters a leg up, since their signatures may not be checked. With a chip-and-pin card, on the other hand, the thief would need to know the credit card PIN to complete a transaction.

Protecting Yourself From Credit Card Fraud

While chip-based credit and debit cards have been a game-changer in improving payment security, card thieves still have ways to either steal your card or lift sensitive personal data from a payment card.

Here are some ways you can protect yourself against credit card fraud:

•   Review your card statements. One of the important credit card rules to follow is checking your card statements regularly for potential security issues. If something looks suspicious, immediately contact your credit card issuer. In the case of unauthorized charges, report the fraudulent activity and follow the steps recommended by the card company, which could include freezing the card temporarily or getting a new card.

•   Keep physical possession of the card at all times. A cardholder’s best defense against physical card theft is to always know where their card is and only carry it when needed. It’s also a good idea to avoid storing your card account number on a digital device — particularly sensitive information like the credit card CVV number — that could be stolen by a savvy cyber thief.

•   Shred any documents that contain sensitive information. To further protect your account information, shred physical payment card files that include your credit card or account number once you’ve paid your monthly bill. Better yet, sign up for paperless billing, so there’s no paper trail at all.

•   Watch out for email scams. Steer clear of “phishing” scams, i.e., fraudulent emails or texts pretending to be from trusted retailers and financial institutions. If you receive an email requesting sensitive information, reach out to the company directly using the contact information listed on their website or on the back of your card.

Recommended: What Is the Average Credit Card Limit

The Takeaway

The introduction of credit card chips has greatly increased the security of credit card transactions. Credit card chips generate a unique code for each transaction, and that code cannot be used for future transactions. This makes it harder for thieves to intercept your personal data — though that doesn’t mean credit card fraud isn’t still possible.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What is the chip on credit cards?

A credit card chip is a microchip embedded into a credit or debit card that securely stores transaction data. This helps to facilitate safe and efficient payment card transactions.

Are chip-and-signature cards as safe as chip-and-PIN cards?

Not necessarily. That’s because the merchant may not require a signature or verify it against the one on the back of the card. This means it may be easier for thieves to get away with signing on behalf of the actual cardholder. It’s likely more difficult for a thief to get hold of a cardholder’s PIN.

Do all retailers accept EMV cards?

A high percentage of global retailers accept chip-based credit and debit cards. Industry figures show that EMV chip cards comprised over 90% of the global credit card transactions in the most recent year reviewed.

Is tapping or contactless credit cards safer?

Both are secure ways to make transactions. That’s because both contactless and chip credit card transactions generate a new transaction code for each purchase.

Photo credit: iStock/Georgii Boronin

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOCC-Q224-1905628-V1

If you unintentionally overpay your credit card bill, you may see a negative balance on your account. Although overpaying a credit card isn’t ideal — that cash flow could’ve been used toward another expense, after all — it’s usually not cause for concern.

If you overpaid your credit card, interest isn’t charged on the amount; in fact, that amount is owed back to you. What you do next, whether that’s requesting a refund or applying the overpayment to next month’s bill, is your choice.

How Credit Card Overpayments Happen

Since credit cards work by providing you with revolving purchasing power up to your limit, any activity on the account can change your available balance — even after you’re issued a monthly billing statement. This includes new purchases on the account that increase your credit card balance, but also payments or credited amounts that lower the outstanding amount you owe.

If you end up making a payment to your credit card issuer for a higher amount than you owe, for instance, it results in an overpayment. This is also called a negative balance.

Recommended: When Are Credit Card Payments Due

How You Could Have Overpaid Your Credit Card

There are a few circumstances that might result in an overpaid credit card.

Manual Payments

Submitting a manual credit card payment for an amount that’s higher than your actual outstanding balance will push your account into a negative balance. This might happen if you’ve been repaying a large purchase in equal increments each month, but make a math error or have an oversight.

For example, say you used your new 0% APR credit card to purchase a laptop for $2,150 and plan to make manual monthly payments of $500. By month five, you’d only need to make a $150 payment to pay off your card balance. But if you forget what your current balance is, you might accidentally make another $500 payment. The $350 difference would be an overpayment on your account.

Paying attention to your outstanding balance on the day you plan on making a manual payment can help you avoid overpayment.

Additional Payments on Top of Automatic Payments

You might also overpay credit card balances if you made a payment to avoid credit card interest charges, but didn’t realize that you already had autopay enabled on your account.

The scheduled automatic payment will still be processed, regardless of any manual payments, unless you cancel it for the month. For this reason, a double payment can result in an overpaid credit card.

Before making an extra payment, double-check whether you’ve enacted autopay and see how another payment might affect your outstanding balance.

Recommended: How to Avoid Interest On a Credit Card

Receiving Refunds

Another common scenario resulting in an overpaid credit card is if you return a purchase to a merchant or get a refund for a service. If the amount of the purchase was credited back to your credit card and you make a payment based on what’s shown on your statement balance that arrived before this transaction, you’ll overpay your credit card bill.

If you returned an item and received a refund back on your card, remember to adjust your manual payment or autopay to reflect your new balance due.

Guide to Rectify Overpaying Your Credit Card

Now that you know what happens if you overpay your credit card, you may be wondering if there’s anything you can do to fix it. If your credit card balance is under $0, and you’re owed money back, there are a few ways to move forward.

Request a Refund

The Fair Credit Billing Act (FCBA) protects your rights when it comes to how your credit card account is handled. It states that you have the right to request a refund if you overpay your credit card by more than $1.

The credit card rules state that the issuer must give you a refund in the payment method of your choosing within seven business days of receiving your request. Additionally, it must, in good faith, make attempts to return unapplied overpayments that have been on the account for over six months.

When requesting a refund by mail, make sure to send your request through certified mail so you have proof of the date it was received by the bank.

Allow the Negative Balance to Roll Over Next Month

Another way to address a negative balance on a credit card is simply to do nothing. If you don’t explicitly request a refund, the bank will automatically roll over the unapplied credit toward your next statement balance.

If you have a larger statement balance than your credit during the following month, the overpayment credit will be applied and the remaining balance you owe is reduced. However, if your credit is greater than your new statement balance, your adjusted credit amount will roll over again.

It will continue this way until you’ve effectively used all of your account’s overpayment credit or you ask for a refund.

Enable Autopay on Your Credit Card

If you’re not already enrolled in automatic payments, enabling autopay for your credit card bill can help prevent overpayments due to manual payment errors. Leveraging your card’s autopay feature is a responsible way to use a credit card since it ensures you pay the correct amount on your account on time.

If you set up autopay to always pay your statement balance or outstanding account balance, it also helps you avoid credit card debt that’s getting increasingly harder to pay off.

Does an Overpaid Balance Affect Your Credit Score?

Having an overpaid credit card balance is better than having a positive balance on your account. Credit card companies report negative balances as a “zero balance” when forwarding your card activity to the credit bureaus.

A zero balance lowers your credit utilization, which impacts your credit score calculation. Although it can build your credit compared to carrying an outstanding balance, the effect of an overpayment is the same as making a payment for the correct amount to reflect that you owe $0. In other words, it won’t help you build your credit score.

The Takeaway

Although overpaying credit card balances is a common occurrence, following the tips above can help you avoid a negative balance. Paying attention to this can help prevent your discretionary cash flow from getting tied up with your card issuer unnecessarily — a key to smart credit card habits.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

What happens if I overpay my credit card?

If you overpay your credit card, the amount is reflected as a negative balance on your account balance. You can request a refund or let the bank apply it to your next statement.

Does a negative balance have an effect on my credit score?

No, a negative balance doesn’t affect your credit score. Your bank reports it as a zero balance.

How long do you have to dispute a credit card charge?

You have 60 days to dispute a credit card charge, starting from the date it appears on your statement. The bank is legally required to acknowledge your dispute within 30 days of receiving it. A resolution must be enacted within two billing cycles or a maximum of 90 days from your dispute date.

How can I request a refund after overpaying my credit card?

Send a notification to your bank requesting a refund and specifying the method in which you’d like to receive it, such as a check or other method. Check with your bank about how to submit it. The bank is required to provide your refund within seven business days of your request.

Photo credit: iStock/Really Design

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC-Q224-1909099-V1

Late payments only make it onto your credit report if they’re late for more than 30 days. Once a payment is late for 30 days, the creditor will likely report it to the credit bureau, where it will stay for seven years from the date of the first delinquent payment. Because late payments can have a negative impact on your credit score, it’s best to avoid them when possible.

Here’s what you need to know about this important topic.

What Is Considered a Late Payment?

Most accounts have a grace period after the due date where the lender will accept payment without any penalty. The exact length of a grace period will depend on the terms of your credit card or other account, but 21 days is common.

After the grace period, your lender may charge a late fee or make other changes to your account. Once your account is 30 days or more past due, your lender will typically report it to the major credit bureaus.

When Do Late Payments Fall Off a Credit Report?

In most cases, it will take seven years for a late payment to fall off a credit report. Even if you bring your account current after the late payment has already been reported to the credit bureaus, it will still show up on your credit report for seven years after the first late payment. This is why one of the top credit card rules is to make payments on time whenever possible.

Recommended: When Are Credit Card Payments Due

How Late Payments Affect Your Credit Score

One of the consequences of a credit card late payment is that it will have a negative impact on your credit score.

Your past payment history is one of the biggest factors in what affects your credit score. As such, if you have a significant amount of late payments on your credit report, it will be tough to have an outstanding credit score.

How to Remove Late Payments From a Credit Report

It’s difficult if not impossible to remove a late payment from your credit report — unless it was reported in error.

However, the only way to find out if a late payment is reported in error is if you regularly review your credit report. If you have documentation that shows that you made the payment on time, you can contact the credit bureau and ask them to update your credit score and credit report.

What Can You Do to Minimize the Impact of a Late Payment?

If you’re willing to do the legwork, there are a couple steps you can take that could potentially minimize the impacts of a late payment.

Negotiate

One option you have for minimizing the impact of a late payment is to negotiate with your credit card issuer. This will generally be more effective if it’s only been a short time since your payment was due or if you have not had late payments previously. For example, your lender may be willing to waive any late fees or penalty interest if you enroll in autopay and/or pay any past-due balance.

Dispute Errors on Your Credit Reports

If it’s been more than 30 days and your lender has already reported the late fee to the credit bureaus, it can be difficult to remove it from your credit report. However, if you have documentation that you made the payment on time, you can contact the credit bureaus to have them update and correct your credit report.

This is why it is important to understand how checking your credit score affects your rating — generally when you are reviewing your own credit report, it does not impact your credit score. Regularly reviewing your credit report for errors and discrepancies is a great financial habit to have.

Guide to Avoiding Late Payments

Since it is difficult if not impossible to remove late payments from your credit report once they’re there, the best course of action is to avoid late payments in the first place. Here are a few tips on some of the best ways to avoid late payments.

Set Up Autopay

One great way to avoid late payments is to set up autopay from a checking or savings account. That way, you know that your payments will be made each and every month.

You can customize your autopay payments to cover the minimum amount, the full statement balance, or anywhere in between. You’ll just want to make sure you have enough funds in the attached account to cover the balance.

Set Payment Reminders

If you can’t or don’t want to set up autopay on your accounts, another option is to set up payment reminders. That way, you can get an email or text message a few days before your payment is due. Getting a reminder can help you remember to make the payment on or before its due date.

Change Your Payment Due Date

Sometimes the due date for a particular loan or credit card doesn’t line up conveniently with when you have the money to pay it. You might find that your credit card due date always seems to come a day or two before payday. If that’s the case, many lenders allow you to change your payment due date to one that’s more convenient for you.

Recommended: Can You Buy Crypto With a Credit Card

The Takeaway

Paying your credit card and other debts on time can be one of the best ways to positively impact your credit score. Late payments can be reported to the credit bureaus as soon as 30 days after the due date. Once they’re on your credit report, they will stay there for seven years from the date of the first late payment.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Can I get late payments removed from my credit report?

Typically, once they’ve been reported to the credit bureaus, you can only get late payments removed if you didn’t actually pay late. If you have documentation that shows that you made the payment on time, you can submit that to each credit bureau and ask that they update your credit score.

Is it true that after 7 years your credit is clear?

Late payments and some other negative factors do remain on your credit report for seven years. That means that if you have not had any negative marks or late payments for seven years, you’ll be starting with a fresh slate.

Is payment history a big factor in your credit score?

Yes, payment history is a big factor in how your credit score is determined. While each credit bureau calculates your credit score differently, payment history is typically listed as one of the biggest factors in what affects your credit score.

Photo credit: iStock/tommaso79

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

SOCC-Q224-1910937-V1

Credit card points are a common incentive for cardholders to actively make purchases on a rewards credit card. Once earned, cardholders can use credit card points toward a redemption option they find worthwhile. This can include travel or a purchase credit toward a good or service.

Read on to learn more about how credit card points work, including how to get and how to use credit card points.

What Are Credit Card Points?

Credit card points are one of many different credit card rewards that card issuers offer to consumers through a rewards program like SoFi Plus. For instance, a program might offer you two points for every dollar you spend on the card, which you could then redeem for use once you’ve accumulated a certain amount of points.

Points act as a form of currency within a credit card rewards program, designed to entice cardholders into maintaining spending activity on the card. Some reward programs for credit cards are also co-branded to encourage loyalty to a particular brand.

How Do Credit Card Points Work?

Understanding how credit card points work ultimately comes down to knowing how to earn points on credit cards — and then how to redeem them.

Earning Points on Credit Cards

There are a number of ways to earn points on your rewards credit card account:

•   Everyday purchases: Using a card as your primary payment method for your routine expenses is one way to earn points. Depending on your preferences and the features of other rewards cards in your wallet, you might choose to put purchases, like your morning coffee, groceries, rideshare expenses, and more on the card.

You might also choose to dedicate certain spending categories to a rewards card that offers bonus points toward that purchase. For example, if your rewards card offers 5X points when using your card at the supermarket, you might decide to use the card for grocery costs only.

•   Shopping with credit card partners: Part of finding the right card for you is researching whether the credit card partners with brands and services that you already shop with. For example, some cards partner with ride-sharing services, like Lyft, and offer bonus points for every Lyft purchase put on the card.

Note that some card issuers require you to pre-register for this type of bonus point incentive. You might have to link your rewards card to your Lyft account in order to receive bonus point credit for ride costs, for instance.

•   Sign-up bonuses: If you’re expecting a costly upcoming expense, like a medical bill or home repair, a common strategy to earn credit card points quickly is finding a competitive credit card bonus offer. Sign-up bonuses typically offer a promotional bulk quantity of points after you spend a minimum amount on the card within the first few months of opening the account.

Putting your large purchase on a new card accelerates your point earnings, but make sure you can pay your monthly statements in full to avoid interest charges — one of the important credit card rules to abide by in general. If you allow your balance to roll over into the next month, it can cut into the value of a sign-up points bonus.

•   Referral points: When you refer a friend to your rewards credit card program, some card issuers offer a referral bonus. Typically, you’ll receive a referral bonus reward, and your friend also receives bonus points if they meet certain spending requirements on their new card. Referral points vary by credit card, but it’s another option for cardholders who want to earn points on credit cards while giving friends a bonus perk, too.

Redeeming Points on Credit Cards

You can redeem credit card points in various ways. Common options to redeem credit card rewards points, depending on your card’s redemption choices, include:

•   Flights

•   Hotel stays

•   Car rentals

•   Statement credits

•   Cash back

•   Gift cards

•   Merchandise

•   Online retailers

•   Special experiences

•   Charitable donations

Redemption typically takes place through the card issuer’s app or website, or through the issuer’s dedicated rewards program website.

Types of Credit Card Rewards

Credit cards offer different types of rewards options. The common “currencies” are points, miles, and cash back.

Reward Points

You can earn credit card points by making purchases on your rewards card. Some credit card products offer a flat rate per dollar spent on your card, while others offer bonus points toward a spending category.

For example, a card might offer tiered bonus points at a rate of 5 points per dollar at restaurants, 3 points per dollar toward every gasoline purchase, and 1 point per dollar on everything else.

Miles

Miles are a common reward unit that’s typically used among travel credit cards and airline-branded rewards cards. Depending on the mileage rewards program, you’ll typically earn bonus miles when charging travel-related expenses on your rewards credit card. Some credit cards also let you earn miles on non-travel purchases at a lower mile-per-dollar rate.

This type of credit card reward is ideal for regular travelers who often fly to their destination and are interested in using credit card rewards to travel for less. If you prefer flying on a specific airline, a branded rewards credit card can help you earn miles toward a future flight, in addition to other redemption options, like hotel stays or goods. General rewards mileage cards can be redeemed in a similar way, but it’s not restricted to a particular carrier.

Cash Back

Credit cards that offer cash back rewards let you earn a percentage of cash back based on the amount you spend. This can typically be redeemed as statement credit to reduce how much you owe on your monthly credit card bill, which can be part of using credit cards responsibly. Or it can be redeemed as cash sent directly to you. Some cash back credit cards let you redeem cash back rewards as credit toward a purchase through one of the issuer’s partners.

If you’re not an avid traveler, a cash back card can be a straightforward option to earn and redeem rewards. Many card issuers offer a flat-rate rewards model that offers an easy-to-remember cash-back percentage on all card purchases.

How Much Are Credit Card Points Worth?

The value of each credit card point is generally worth 1 cent. However, reward valuations vary between credit card reward programs and can also differ based on how you choose to redeem them.

For example, your credit card points could be worth 1 cent when you redeem them for cash or gift cards, but worth 1.25 cents when you redeem them for travel-related options, such as flights or dining. Keep in mind that these amounts can vary widely, so it’s important to understand the terms and conditions of your credit card.

Recommended: Tips for Using a Credit Card Responsibly

Getting the Most of Your Credit Card Points

Below are a few helpful ways to maximize your credit card points:

•   Stay on top of bonus categories. Some rewards credit cards offer rotating bonus spending categories that temporarily increase the points you can earn per dollar spent on the card. These types of cards often require you to “enroll” in the bonus category, so familiarize yourself with your card’s bonus calendar.

•   Be aware of bonus limits. Read the rules of your rewards program, including thresholds on the maximum dollar amount that’s eligible for bonus rewards.

•   Calculate if the annual fee is worth it. Before signing up for a rewards credit card, review your spending habits over the last year. Note the spending categories and amounts you’ve spent. Based on this information, calculate whether the card’s rewards program and benefits — like TSA PreCheck credit and other perks — exceed the annual fee you’d spend each year.

The Takeaway

Accruing credit card points, miles, or cash back can be worthwhile as long as you use your card responsibly and select a rewards card that fits your lifestyle. Before putting your earned rewards toward a high-dollar purchase, or applying earned cash rewards to your monthly statement, keep your objective in mind.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do credit card points expire?

Typically, credit card points don’t expire. However, your points might expire if your credit card account is closed, falls into bad standing, or after a period of inactivity. Different cards have varying rewards program terms and conditions, so check with your card issuer to see if your credit card points have an expiration timeline.

Do credit cards with rewards have higher interest rates?

Rewards credit cards tend to have higher interest rates compared to regular credit cards. Cardholders with a positive credit history and strong credit score generally qualify for lower interest rates compared to those with a low credit score.

What is the use of earning reward points on my credit card?

Earning rewards points on your credit card allows you to get something in exchange for the spending you do with your credit card. For example, depending on your rewards program, you can redeem credit card points as a cash back reward or put them toward future travel or other purchases.

Photo credit: iStock/stefanamer

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.


Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOCC-Q224-1910893-V1