6 Ways Credit Card Rewards Work for You

Get ready to scoop up more rewards.

Credit card companies are jockeying for your business, so they're dishing out more and better rewards offers.

Their rewards programs let you rack up points every time you use your credit card. Cardholders can typically exchange their points for cash and/or use them to pay for travel or certain retail items and services, which are usually listed on the card's website.

Most people prefer cash-back rewards, which let you redeem your points for cash rather than for merchandise. And credit cards are dishing out more cash. Some cards pay out up to 5 percent of a set amount that you charge, though some purchases may be excluded, says Andrew Davidson, senior vice president at market research firm Mintel Comperemedia in Chicago.

But that's not all. You can increasingly choose innovative ways to receive your rewards points that can bolster your finances. You can pay your taxes, beef up your individual retirement account or opt for gift cards sweetened with discounts. Banks also are offering more loyalty programs, which reward consumers for adding services such as online bill payment.

Here's what the rewards landscape looks like in today's competitive rewards environment.

More Cash-Back Offers

Cash-back credit card rewards are usually more generous than debit card rewards. And they're also being offered more frequently.

Know that cash-back rewards programs can be complex, says Ken Paterson, director of credit advisory service at research and consulting firm Mercator Advisory Group in Maynard, Mass.

To sort through the noise, focus on the rewards' core earn rates, which are the rewards that you get for each dollar spent, he says. Cash-back cards typically reward you at lower rates, though some bonus rewards like gas may be higher.

Also, some cards have tiered earnings rates; others have flat rates across all categories.

If you opt for cash back, good spending habits are necessary. Cash-back credit cards typically charge higher interest rates than other credit cards, making them pricier if you don't pay on time.

Gift Cards Offer More Bang

Gift cards are becoming a key way to deliver rewards, Paterson says.

First, they're convenient to use, especially if you often use specific stores. And second, some issuers partner with merchants to give you special offers that may slice another 10 percent to 20 percent off a product's price.

"That's a win for everyone, especially if it's a store you use a lot," he says.

The bottom line is that gift cards can be an easy way to stretch your rewards points even further.

Using Rewards to Pay Taxes

Credit card rewards can now be used to complete other transactions.

American Express allows cardholders to use rewards points to pay federal, state and local income taxes. But there are catches. Using rewards to pay taxes eats up a lot of points quickly. And payments are made by filing taxes via a tax-paying website such as Official Payments, which charges service fees.

Look at redemption rates, says Davidson. They might not be the best use of your rewards points.

On the plus side, some credit cards award points when you use them to pay taxes.

Need retirement savings help?

Investing in your future is another way to use credit card rewards points.

There are a few cards that allow users to deposit rewards points in IRAs or 529 accounts or put rewards points toward paying down their mortgages.

These cards often come with restrictions -- for instance, one such card requires the cardholder to make $2,500 in purchases before points can start going to the mortgage -- so be sure to read the fine print.

The Fidelity Retirement Rewards American Express Card is an example of a rewards card in which points can be deposited in a retirement account or a 529 account.

"It's a great card for somebody who wants to apply rewards to a goal such as college spending," says Patricia Gooding, a vice president of product management at Fidelity Investments in Boston. "You can set it and forget it."

Making the Most of Your Rewards

To maximize your rewards, zero in on cards that reward you generously for everyday activities like shopping or banking. And read the offer's fine print, says Paterson.

Some reward programs are capped or have expiration dates. And credit card companies sometimes will change their rewards and their values without notice.