U.S. Banks Pay Out $35 Billion in Credit Card Rewards. Are You Taking Advantage?

Those cash rewards and points are worth big bucks.

Rewards credit cards are no secret at this point. Even those who don't use them have probably heard about them and seen them advertised. What most people don't realize is just how much card issuers pay out in credit card rewards.

A recent study revealed that information, and it's a staggering sum. The largest banks paid $35 billion in rewards in 2019.

However, that value isn't distributed equally. It's largely savvy consumers with good credit scores who benefit the most. Consumers who don't follow good credit habits, on the other hand, usually lose money. By learning more about how rewards work, you'll be able to make the most of them.

How credit card rewards work

If you're new to credit card rewards, the best place to start is the basics. Many credit cards earn rewards on purchases you make. There are a few popular types of rewards:

• Cash back: Exactly as the name suggests, this is cold, hard cash. You can normally use it to reduce your credit card bill, deposit it to your bank account, or request a check.
• Travel rewards: These are rewards you can redeem for travel, and there are a whole lot of options out there. Depending on the travel card, you could earn frequent flyer miles with an airline, points with a hotel chain, or transferable points that can be used with many airlines and hotels.
• Store points: Points you can redeem to get a gift card or discount at a specific store.

If you want to save money and keep it simple, cash back is the way to go. If you travel often, travel rewards should fit you well. Store credit cards, to be honest, are rarely a good choice. They're much more limited than cash back and travel cards, since they typically only offer value at the stores that issue them.

The way that rewards credit cards work is pretty straightforward: Every time you make a purchase with your rewards card, you earn rewards. The amount is determined by the card's rewards rate. Let's say you have a cash back card that earns 2% back on any type of purchase. If you make a $100 purchase, that's $2 in cash back.

Your card issuer will deposit the rewards you earn to your rewards balance. When you're ready to redeem rewards, you can do so online or by phone. There may be a redemption minimum, such as $25 in cash back. Fortunately, many of the top rewards credit cards don't have redemption minimums.

Getting the most value from credit card rewards

It might seem like it's easy to make money from credit card rewards; that's actually not the case. The rewards study cited above found that on average, only consumers with high credit scores came out ahead. Consumers with lower scores paid more in fees, and particularly credit card interest, since rewards cards tend to have higher APRs.

There's really just one key habit you should follow to ensure you make money from credit card rewards: Pay your credit card's full balance, by the due date, every month. When you pay in full, the card issuer doesn't charge you interest. That means you make a profit from all the rewards you earn.

If you do that, you're already in a good position. You can also get even more value by learning how to maximize credit card rewards. Here are some tips that will help with this:

• Take your time picking the right rewards card. There are many rewards cards available, all with their own unique sets of features. Start by figuring out if you want a cash back card or a travel card, and then look at some of the best credit cards in that category.
• If a card has an annual fee, make sure you'll get your money's worth. Cards with annual fees normally have more benefits, so they can be worth it for some people. But if you're not sure you'll break even, stick to no annual fee credit cards.
• Use your rewards credit card for all your expenses -- but don't overdo it. It makes sense to pay for everything with your credit card to earn the most possible rewards. Just be careful not to start overspending and justifying it with the rewards you'll earn.
• Get a card that matches your spending habits. Some rewards cards earn the same rate everywhere, while others earn higher rates in bonus categories, such as gas and groceries. Pick one that matches up well with the areas where you spend the most.

Those are all simple, effective ways to get more value from credit card rewards. There are also more advanced strategies, such as opening multiple rewards credit cards for more benefits. Doing so also allows you to earn more bonus rewards, if those cards have different bonus categories.

It's up to you how much you want to learn. Some people find rewards cards fun and interesting, but it doesn't take hours of study to make money from rewards. If you want an easy-to-follow strategy, just get a rewards card you like, use it for your purchases, and always pay in full.