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The 3 kinds of credit card rewards programs and how they work

If you have credit cards that earn cash back, points or miles, you may not know how to redeem your rewards. Here's a guide on understanding rewards programs.

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Rewards credit cards let you earn cash back, points or miles that can enhance the value of paying with a credit card over cash or debit cards.

However, rewards programs have rules, such as when you're allowed to redeem rewards, that can make it confusing to navigate your card's program. And if you have four credit cards like the average American, it can be an even bigger task to understand the ins and outs of multiple programs — especially if you have a mix of cash back, points and miles cards.

Below, CNBC Select reviews how credit card rewards programs work, so you can understand how to maximize the benefits of your rewards card.

What is a rewards card?

Before we dive into credit card rewards programs, it's important to understand what is considered a rewards card. If a card provides you with the opportunity to earn cash back, points or miles on purchases, it's a rewards card.

These cards either provide you with the same amount of rewards on every purchase (known as flat-rate rewards) or bonus rewards on certain categories (such as increased earning rates on dining out or groceries).

You can only earn rewards on new purchases, not on balance transfers or cash advances.

Types of credit card rewards programs

Credit cards generally offer one of three reward structures: cash back, points or miles. The type of rewards you earn depends on the card you have.

Cash back

The majority of cash-back cards let you earn a certain percentage of cash based on your spending, such as the Citi® Double Cash Card, which provides 2% cash back in total: 1% on all purchases and an additional 1% after you pay your credit card bill.

However, some cash-back cards actually accrue points that can be converted into a dollar value. For instance, the Chase Freedom® and Chase Freedom Unlimited® are marketed as earning cash back, but rewards are provided as Ultimate Rewards points. The points vary in value based on how you choose to use them.

Points

Other rewards cards that don't earn cash back either provide points or miles. For example, the Chase Sapphire Preferred® offers Ultimate Rewards points, whereas the American Express® Gold Card offers Membership Rewards® points.

Miles

Most co-branded airline cards offer miles as part of the brand's unique membership rewards program. One example is co-branded Delta cards, like the Delta SkyMiles® Blue American Express Card, which offer rewards as SkyMiles (Delta Airlines' membership rewards).

How cash back, points and miles work

Each rewards program works a bit differently, so it's important you understand the basic rules below.

Value of rewards

The amount your rewards are worth can vary by program. Cash-back cards are the most straightforward since you receive a percentage of your spending back. A 2% cash-back card means a $100 purchase effectively earns $2 back. However a $100 purchase with a 2X points or miles card isn't always equal to $2 back. It can be less or more, depending on the card and how you redeem them.

When deciding on how to use your points, it's a good idea to strive for a 1:1 value, meaning one point/mile is worth a penny. To calculate if you're getting a 1:1 value, take the cost of the redemption item (such as a gift card or travel reservation) and divide it by how many points/miles are needed.

Redemption options

While the value of rewards varies between programs, redemption options are often similar. Here are common options:

  • Statement credit
  • Deposit to a linked bank account
  • Pay with points at checkout for select online websites
  • Gift cards
  • Travel reservations
  • Merchandise
  • Charity

When you can redeem rewards

Some card issuers require you to reach a certain threshold — typically $25 or 2,500 points/miles — before you can redeem rewards. However, certain card issuers, such as Capital One and Chase, let you redeem points at any amount.

Rewards expiration

In most cases, as long as your account remains open and in good standing, you'll have access to your rewards. But if you close your account or become delinquent, you'll risk losing your rewards.

How to redeem rewards

After you make a purchase, you're likely eager to redeem rewards. However, rewards can take one to two billing cycles to post to your account. Once they appear, you'll be able to start the redemption process.

Card issuers often have rewards portals that serve as a one-stop place to view and redeem your rewards. Simply log in to your account and navigate to the rewards section. From there, you'll be able to see your rewards balance and browse available redemption options.

Before you settle on a redemption, make sure you calculate the value of your rewards. How much your rewards are worth often varies between statement credit, gift card, travel, merchandise and other redemption options. Aim to get a 1:1 value so you don't devalue the cash back, points or miles you earn.

The timeline to receive your reward redemption depends on the option you choose. A statement credit may take up to a week to post to your account, whereas an e-gift card can hit your inbox within minutes.

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How to manage reward redemptions with multiple cards

If you have multiple cards that earn different types of rewards, it can be confusing to keep track of how each rewards program works. To make rewards redemption easier, understand the basic rules mentioned above for each card you have.

Also keep in mind these two limitations:

  1. You can only transfer or combine rewards with cards from the same issuer, meaning from one Amex card to another Amex card.
  2. You can only transfer or combine rewards between the same type of cards, such as a point card to another point card.

Managing multiple rewards programs can be tricky. However, it's easier if the cards are from the same issuer. You'll be able to access each card with the same login and potentially view various rewards details at the same time. Plus you may have the ability to transfer rewards between cards.

For instance, Amex allows its cardholders to transfer rewards between its Membership Rewards cards. So you can move points from the American Express® Gold Card to The Platinum Card® from American Express. This lets you pool points and redeem them for a larger reward.

As we mentioned earlier under cash-back cards, Chase is the exception to the second limitation shown above. Many Chase credit cards earn Ultimate Rewards points and provide the flexibility for points to be transferred between cards. That means you can move points from the Chase Freedom® (cash back) to the Chase Sapphire Preferred® (points).

However, if you have a mix of cash back, points and miles cards each from different issuers, you won't have the ability to combine rewards. Instead, you'll need to stick to redeeming rewards individually for each card. For instance, you can redeem rewards for a statement credit on your cash-back card to offset your bill. Then, any cards earning points or miles can be used for travel and gift cards, among other options.

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Information about the Chase Freedom® has been collected independently by CNBC and has not been reviewed or provided by the issuer of the card prior to publication.

Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the CNBC Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.