Credit card rewards are a simple concept: you get a small bonus for the spending you already do. When you use a rewards card to make a purchase, the card issuer gives you something back. Think of it as a thank you for using their card.

This system is funded by interchange fees, which are small charges paid by merchants every time a customer swipes a credit card. A portion of that fee is then returned to you in the form of rewards. It's a way for card companies to encourage you to use their card over a competitor's or cash.

While there are many different rewards programs, they almost all fall into one of three categories.

Points: Points are a more flexible currency. You earn a certain number of points for every dollar you spend. These points can then be redeemed for a variety of things, like gift cards, merchandise, or travel booked through the card issuer's online portal. The value of a point can change depending on what you redeem it for.

Miles: These are a specialized type of point designed for travel. You earn miles per dollar spent, which can then be redeemed for flights or hotel stays. Some miles are tied to a specific airline's loyalty program (like American Airlines AAdvantage), while others are part of a more general travel rewards program that lets you transfer miles to various airline and hotel partners.

Most rewards cards offer a base earning rate, like one point or 1% cash back per dollar on all purchases. But the real power comes from bonus categories. These are specific types of spending where the card offers a higher rewards rate.

Once you've earned rewards, you need to understand their value. Cash back is easy, since a dollar is always a dollar. But for points and miles, the value can vary widely. This is where the idea of "point valuation" comes in.

To figure out what your points are worth for a specific redemption, you can calculate the "cents per point" (CPP) value. It's a simple formula:

For example, if you can redeem 50,000 points for a plane ticket that costs $500, your CPP is 1 cent ($\frac{500}{50000} = 0.01$). But if you found a business class ticket worth $2,000 for 100,000 points, your CPP would be 2 cents ($\frac{2000}{100000} = 0.02$). Your points are twice as valuable in the second scenario.

Understanding these basics helps you see how rewards programs work. You earn rewards by spending, you earn them faster in bonus categories, and you get the most value by redeeming them wisely.

Time to check what you've learned.