What credit card bonus points are and how you earn them
Credit card bonus points are rewards you earn when you spend money using a card. Most cards offer a sign-up bonus — a large number of points awarded after you spend a set amount within a certain timeframe, usually three to six months. After that, you earn points on every purchase you make, at a rate that varies by card and sometimes by category.
For example, a card might offer 50,000 bonus points after you spend $3,000 in the first three months. Then it might earn 2 points per dollar on groceries and gas, and 1 point per dollar on everything else. The points sit in an account tied to your card and don't expire as long as the account stays open, though some cards do have expiration policies you should check.
The card issuer — usually a bank like Chase, American Express, or Citi — funds these rewards through the fees merchants pay when you use the card. They're betting that the reward value is less than what they make from those merchant fees and from interest if you carry a balance.
Key Takeaways
- Sign-up bonuses require you to spend a minimum amount in a set timeframe, and they're usually worth more per point than ongoing rewards.
- The real value of your points depends on how you redeem them — cash back is worth a fixed amount, but travel redemptions can be worth more or less depending on the flight or hotel you book.
- Points have no value until you redeem them, and some redemption options are worth significantly less than others on the same card.
- Bonus points are taxable income in the year you receive them if the card issuer reports them to the IRS, though most do not for rewards under certain thresholds.
How to calculate what your points are actually worth
The stated value of points is almost never what they're worth in practice. A card might say "each point is worth 1 cent," but that's only true if you redeem for cash back at that rate. If you use points to book a flight, the same point might be worth 1.5 cents or 0.5 cents depending on the flight you choose.
To find the real value, divide the dollar amount you get by the number of points you spend. If you redeem 50,000 points for a $750 flight, each point is worth 1.5 cents. If you redeem the same 50,000 points for a $400 gift card, each point is worth 0.8 cents. The card's website usually shows you the redemption value before you confirm, so you can compare options.
Sign-up bonuses are often worth more per point than ongoing rewards. A 50,000-point sign-up bonus might be worth $500 to $750 depending on how you redeem it, while the same card earns you only 1 or 2 points per dollar on purchases. This is why the sign-up bonus is the main financial benefit of opening a new card.
Where you can use your points
Most cards let you redeem points in several ways, and the options vary widely by card and issuer. Common redemption paths include cash back (a direct deposit or statement credit), travel bookings through the card's portal, gift cards to retailers, or transfers to airline and hotel loyalty programs.
Cash back is the simplest option and usually offers a fixed value — often 1 cent per point. You won't get a surprise that the redemption is worth less than you expected. Travel bookings through the card's portal can be worth more per point, but only if you're booking a flight or hotel that's actually a good deal at that price. Gift cards are usually worth 1 cent per point as well, though some cards offer bonus redemption rates for certain retailers.
Transfers to airline and hotel programs are the highest-variance option. You might transfer points to an airline at a 1:1 ratio and find that those points book a $2,000 first-class ticket, making each point worth 2 cents or more. Or you might transfer them and find that the cheapest available flight costs 50,000 points, which is worth less than the cash back option. Always check what's actually available before you transfer.
Annual fees and whether the bonus is worth the cost
Many cards with large sign-up bonuses charge an annual fee, usually between $95 and $550. The question is whether the bonus value exceeds the fee in your first year, and whether the card's ongoing rewards justify keeping it after that.
If a card has a $95 annual fee and offers a 50,000-point sign-up bonus worth $600 in cash back, you come out $505 ahead in year one even if you never use the card again. But if you close the card after the first year, you won't earn the ongoing rewards. If you keep the card, you need to earn enough points on your regular spending to cover the annual fee in year two and beyond.
Some cards offer a statement credit or other benefit that offsets the annual fee — for example, a $200 travel credit that you can use on flights or hotels. If you actually use that benefit, the effective annual fee is lower. Read the card's terms carefully to see what benefits are included and whether they explore to purchases you actually make.
How sign-up bonuses work and the spending requirement
A sign-up bonus is awarded after you meet a spending threshold within a set timeframe, usually three to six months from when you open the account. The spending requirement is the total amount you must charge to the card — not the amount you pay toward the balance. If the requirement is $3,000 and you spend $3,000 in the first month, you've met it, even if you haven't paid the bill yet.
Some people meet the spending requirement through regular purchases. Others use the card for a planned large purchase — a home repair, a car part, a medical bill — that they were going to make anyway. A third group uses the card to pay bills or subscriptions they already pay, redirecting those charges to the new card temporarily.
The bonus is usually posted to your account within one to three billing cycles after you meet the spending requirement, though some cards take longer. Check your account online or call the card issuer if the bonus doesn't appear within the timeframe stated in your welcome materials. The bonus is not may provide if you close the card before it posts, so keep the account open until you see the points in your account.
Tax implications of bonus points
The IRS treats credit card rewards as taxable income, but most card issuers do not report them to the IRS or to you on a tax form. This is because rewards are generally considered a rebate on the purchase price rather than income. However, if the issuer does report the rewards to the IRS — which can happen with very large bonuses or certain card types — you may receive a Form 1099-MISC and will need to report the value as income on your tax return.
To calculate the taxable value, use the redemption value at the time you received the bonus. If you received a 50,000-point bonus and the card's cash back rate is 1 cent per point, the taxable value is $500. If you later redeem those points for something worth more or less, that doesn't change the original taxable amount.
In practice, most people do not report credit card rewards as income because the IRS does not actively enforce this rule for typical rewards, and most issuers do not report them. However, you should be aware that technically the income is taxable, and if you receive a 1099 form, you must report it.
Comparing bonus offers across different cards
When you're deciding whether to open a card for the bonus, compare the bonus value to the annual fee and the card's ongoing rewards. A card with a $95 annual fee and a 50,000-point bonus might be better than a card with no annual fee and a 30,000-point bonus, depending on what the points are worth and how much you'll spend on the card.
Also consider whether you'll actually use the card's category bonuses. A card that earns 5 points per dollar on groceries is only valuable if you spend a lot on groceries and redeem those points at a rate that makes them worth at least 1 cent each. If you spend $500 a month on groceries, that's 30,000 points per year, or $300 in value at 1 cent per point. If the card has a $95 annual fee, you're netting $205 per year just from groceries, plus whatever you earn on other purchases.
Use a spreadsheet to estimate your annual earning and compare it to the fee. If the math doesn't work out, the card isn't worth opening, no matter how large the sign-up bonus.
Frequently Asked Questions
Do I have to spend the full amount to get the sign-up bonus, or can I get partial credit?
You must meet the full spending requirement to receive the bonus. There is no partial credit. If the requirement is $3,000 and you spend $2,900, you won't receive the bonus. Some cards allow you to combine spending from multiple cardholders on a joint account, so check whether authorized users' spending counts toward the requirement.
What happens to my points if I close the credit card?
Points usually remain in your account for a set period after you close the card, often 30 to 90 days, giving you time to redeem them. After that, they expire. Check your card's terms for the exact policy. If you want to keep the points, you may be able to keep the account open without using it, though some cards close inactive accounts after a year or two.
Can I get the sign-up bonus again if I've had the card before?
Most cards have a restriction that limits the bonus to once per person within a certain timeframe, usually 24 months. If you closed the card and want to open it again, you may not be may be able to access for the bonus when ready. The card issuer's website usually states the restriction clearly.
Are points worth the same across all redemption options?
No. Cash back is usually worth 1 cent per point, but travel bookings can be worth more or less depending on the specific flight or hotel. Always check the redemption value before you book. Some cards show you the value per point for each option so you can compare.
What if I don't meet the spending requirement in time?
You won't receive the bonus. The timeframe is fixed and does not extend. If you're close to the important date, you can make additional purchases to reach the threshold, but you must do so before the important date passes. Mark the important date on your calendar so you don't miss it.