10 Different Types of Travel Rewards

These are passports and tickets along with coins on a map.

In my first few years of carefree travel, I paid no heed to the glossy ads for reward schemes or any of the travel agent’s whistles and bells. Had I known then what I’ve (much) later learned about travel rewards, I might have saved enough money to further indulge my love for the road unknown.

Travel rewards are classified according to their structure (fixed value / variable value), source (Airline, Hotel, Car Rental, Other), and issuer. Within each category, the schemes share similar characteristics. Even so, the various issuers will vary the details in small ways, even for similarly typed rewards.

Because travel rewards target the big-ticket spending items on a traveler’s budget, paying attention to the detail will likely lead to significant cost savings accumulated over time. Diving into the specifics allows the prudent traveler to optimally harvest rewards tailored to the preferred modes of travel.

Table of Contents

What are Travel Rewards?

THis is an airport scene showcasing the signage for terminals and lounges.

Travel rewards are credits that accrue on designated credit cards. A cardholder earns points when spending on designated items or with designated vendors. When critical amounts of these points have accrued, they can be converted into currency.

This happens either directly – where the traveler gets the value of the money returned to be spent at her discretion – or through discounts on designated purchases, usually travel-related.

In many cases, the rewards assume the form of gifted benefits. These include complimentary upgrades of airline tickets, access to transit lounges,  and free accommodation in hotels. In this way, the traveler gets to enhance her travel experience at no extra cost.

Travel rewards may be thought of as a form of currency, like dollars or crypto. As this article will illustrate, there are different types of reward, and the conversion between the reward pseudo-currency and real hard cash depends on the specifics of the relevant program. In some cases, there is the equivalent of a direct peg. In others, the conversion is more fluid.

New Member Bonus Points

This is a close look at the airline ticket and e-tickets.

In order to entice customers, travel credit cards standardly offer free points to new members to kickstart the accumulation. Harvesting initial points is a key part of your accumulation strategy. The points are realized only when a specified spending threshold has been breached. This allows the opportunity to target the spend on items that will maximize further points earned.

In an effort to entrench the card habit amongst new users, the new member bonus often kicks in big and early. The bonus points are usually large, allowing them to be redeemed into big-ticket items (like airline tickets and hotel stay) within months, even if the cardholder maintains a regular spending pattern.

Perks

Perks are access items not in the form of points. They are awarded to members in order to entrench their valuing of the card. Such perks include access to transit lounges, accommodation upgrades, priority check-in, flight cancelation reimbursement, inflight upgrades, foreign transaction fee waivers, and the like.

Transferable Points

These are points in one plan that are convertible into the currency of another. You might, e.g., be allowed to transfer points accumulated on an accommodation plan into airline miles on your flight program.

In those cases, variable conversion rates will determine how many points are obtained in the recipient plan for the incoming points. The relationship is almost never one-to-one.

The transferred points might also be cashed for a fixed value. This can happen through cashback, statement credit, or by spend on an approved portal. Transfers of points are irreversible, so some thought should be given to whether the points are not best spent from the original program.

Instruments of Issue

These are various credit cards in the back pocket.

The main instruments are credit cards, loyalty cards, and loyalty apps. We outline the tools for accumulating travel rewards.

General Travel Cards

These cards give points for general purposes, with more weight given to travel-related purchases. This allows the cardholder flexibility in her accumulation strategy. In some cases, the cards present travel benefits, such as exemption from tax on foreign transactions.

These benefits add convenience and make the use of the cards more of a sticky habit, as the cardholder is incentivized to whip them out.

Airline Credit Cards

These cards are issued as part of airlines’ mutual competition strategy. Points are accumulated based on the cardholder’s history with the airline. The more the airline is used, the greater the accumulation of points. These can then be parlayed into discounts – often massive – on flights with the same airline.

Hotel Credit Cards

Like their airline counterparts, these cards offer accelerated point accumulation when a user builds a track record with the same hotel chain. Cashback offers, free and discounted stays are included in the payoff.

Loyalty Cards

Travel sector vendors outside of the airline and hospitality business use loyalty cards too. These are not generally regarded as travel rewards, even though they are as central a part of the travel experience. Consider, e.g., bookshops and coffee houses in transit areas.

One notable exception is car rental. This service is unreservedly regarded as a travel expense, and loyalty cards are the loyalty instrument of choice for car rental firms.

Loyalty Apps

This is a woman checking the loyalty apps on her phone.

With a proliferation of loyalty programs and the ubiquitous access of smartphones and digital points-of-payment, several loyalty programs are integrated into smartphone apps.

This obviates the need for plastic-heavy wallets and also enables direct, customized communication from the issuing company to the traveler – who now can receive location-relevant messages in real-time. Digital statements make the management of the accumulation strategy easier from the user’s point of view.

Variable-Value Rewards

In variable-value rewards, the reward is quoted on an items-per-point basis. An example is “A free return flight for every 20,000 points earned”. In this case, since the value of the item is not specified (the air ticket for the flight, in this example), the value of the exchange is not known before redemption and will vary as widely as the price of the underlying item fluctuates.

Variable value plans are further divided into standard and dynamic reward plans. Standard plans are as described above, and dynamic ones have a conversion rate that varies with the price of the underlying benefit. These dynamic plans require extra scrutiny as their terms could render them virtual fixed-value programs (see subsection below).

This opens the advantage of upside returns for the vigilant traveler. Care should be taken to consider the item’s value before redemption, against the possibility of saving the points for higher value redemption later.

Fixed-Value Rewards

This is a man monitoring his points and rewards with the app.

This category includes rewards with a specified monetary value. Sometimes the value varies within a narrow range. We consider four varieties.

Cashback Programs

In Cashback Programs, the rewards accumulate as cash on the traveler’s account. This cash can be used at the traveler’s discretion at a later time. A popular option is to apply for a “statement credit.” Here the accumulated reward is netted against the traveler’s statement.

Travel-Restricted Statement Credit Programs

These are cashback programs in which the accumulated points might be redeemed against travel vendors and products only. When a traveler incurs a qualifying expense, she is given the option of paying for it by redeeming points.

Travel Portals

These are online travel-restricted statement credit programs in which qualifying purchases are further restricted. Specifically, they might only be bought through designated online portals.

Fixed Value Airline Points

THis is a person using the self check-in kiosk in the airport.

In these programs, a specific number of accumulated credit points is linked to the price of an air ticket. This establishes a virtual exchange rate between the points system and the travel agent’s currency of denomination.

The transparency of a fixed-value points system allows quick, confident calculation of the redemption amount, with no hidden variables. This makes for more manageable budgeting.

A distinction is drawn between standard and eraser plans. A standard fixed plan offers determined value but can only be applied in restricted purchases. An eraser plan allows that the points be used to net (“erase”) a debit balance.

While fixed-value plans offer transparency and simplicity, they sacrifice the possibility of upside return. This arises only inflexible plans, where the chance of outsize rewards has a non-zero probability. The trade-off between hard work (valuation) and reward (upside) is apparent in variable-value plans.

Hybrid systems, combining elements of fixed and variable reward, occur in one of two ways. Either the program provides different rewards that range between fixed and variable. Or the points are transferable to partner programs. Transferring between a fixed and variable plan generates a hybrid profile.

Air Rewards

Airlines offer frequent flyer points, to reward repeat customers. The traditional frequent flyer program is in the variable-value category, as it does not link the redeemed value to the price of a flight. Instead, the linkage is a function of the traveler’s history on the program, the distance traveled, and the target destination.

Because points and prices are decoupled, the informed traveler is able to access opportunities in which premium flights can be bought for a fraction of the standard price. These opportunities tend to arise when premium products are bought very close to expiry.

Business-class tickets are a favorite target. To understand this, we should consider the airline’s cost optimization strategy. Because these premium items are sold to well-heeled customers, the airlines charge a premium for last-minute cash sales – as the customers are insensitive to price.

If close to departure, it emerges that the flight is not full, the airline is willing to offer concessions on the price in order to maximize revenue.

What are Air Miles?

This is a woman at the window seat of the plane.

Some airline companies offer credit cards that accrue miles instead of points. Analogous to a points card, the miles accrue as the cardholder spends at eligible vendors. A 2X credit card will earn two air miles for every dollar spent.

Such offerings may be hybrid, with higher factors applying to spend on partner vendors. E.g., 1X on an ordinary eligible purchase, and 2X on a purchase from one of the program’s partners (e.g., a sponsoring hotel).

The air miles accrued may be redeemed against air tickets, so a cardholder gets a free ticket on a journey if her accrued air miles exceed the distance of the flight. Redeemed miles are subtracted from the cardholder’s balance.

Transferring Miles

Where airline companies run partner programs, it is sometimes possible to transfer air miles to partner points and vice versa. This adds flexibility to the redemption strategy, but care must be taken as the points conversion rate could erode the accrual value.

Accommodation Rewards

A woman in a bathrobes staying in a hotel room.

Hotel groups launch reward programs in order to attract and retain customers. They have the same grammar as the fixed/variable-value programs described above and have accommodation-related benefits – discounted or free stays in member hotels and participation in partner programs.

Factors to consider in evaluating accommodation rewards are:

  • Size: Does the group have a large number of members. The smaller the hotel group, the less likely that they will be able to intersect with your holiday plans.
  • Quality: Do the hotels offer an acceptable level of comfort and convenience. There’s little point in a free stay at an uncomfortable stayover. Generally, a free night at a five-star hotel is of greater value than a night at a three-star hotel. But travelers might make acceptable quality trade-offs for quantity – e.g., getting two free three-star nights instead of a single five-star one.
  • Spread: Do the benefits gel with the sort of value you would like to receive.
  • Partnerships and eligibility: Related to the previous point, the number and nature of program partners matters as it impacts the ease with which the cardholder can accumulate points and receive benefits. The evokes a further factor:
  • Transferability: Programs that allow points to be transferred are to be preferred. But care should be taken to notice conversion rates. Too much erosion of value makes a nominally transferable program effectively non-transferable.

Car Rental Rewards

The car rental keys are handed over by the worker.

While airlines and hotels are roughly standardized, there is much variance between the programs offered by car rental companies. This sharpens the need for research between different options. All the major car rental companies have been running reward programs for years.

Notwithstanding their internal differences, car rental rewards work on the same principle that drives other travel awards: users accumulate points as they spend with the issuer and its partners. Drawing from the fixed/variable structures, the points earned can be redeemed to fund future rentals.

Decades of reiterative customer feedback and modification of program particulars have led to a wide variety of plans. Travelers should consider the variety of plans against the backdrop of their actual preferences and the interlinking to preferred accommodation and airline plans. In this way, the user gets to align with a rental company that offers value rather than being stuck in whatever plan their existing provider happens to offer.

Since car rental is a common large component of the travel budget, these rewards should be included in the overall consideration of travel awards. The main point to observe is to not vary service providers, renting from the same firm in order to concentrate accumulation.

Other Rewards

Throughout this article, there’s been a reference to other rewards. These arise from two sources: program partners and vacation vendors. Consideration of both sources is important as travel rewards should be viewed holistically. Since the accumulation requires to spend with eligible vendors – often outside the travel industry, those vendors are part of the overall value accretion.

Program Partners

Program partners in sectors outside of travel are part of the equation, as they allow spending, but also because they are vehicles for redeeming value. Several of these partners have transferable loyalty programs of their own, and understanding how these interlink with the primary program is of importance in maximizing the points accumulation strategy.

Vacation vendors

Holiday spending is a part of the overall travel budget, even though the sources of spending are not necessarily travel-related. Cardholders should consider all expenses that correlate with their travel and seek vendors in the relevant areas with loyalty programs of their own. By considering their eligibility, as well as the possibilities of transfer, the attentive cardholder gets to optimize the redemption side of her value curve.

Travel Rewards in Practise

A traveler wearing a mask at the airport with her bags.

Earning and Burning

For the cardholder, the travel reward cycle unfolds over two phases – earning (accumulation)  and burning (redemption) of points. Both legs can be complicated and require careful consideration in order to maintain an optimal reward curve over time.

The three main methods of earning are new member bonuses, eligible spend, and direct benefit (from the issuer). By design, the first yields the fastest benefit, and users should not be blinded into assuming that their initial payoff profile is an indication of what is to come further down the track.

The main ways to burn are free or discounted airfare, free hotel accommodation, and free car rental. The best application is somewhat a matter of taste but should be decided mindful of tax and variability in redemption rates. All things being equal, the traveler wants to redeem through items with the lowest burn rate.

By carefully considering sources of spending and destinations of redemption, cardholders can maximize earn and minimize burn.

Be Sensitive to Differences

The effects of small differences, combined with compounding over time, can have a large cumulative effect on the final value that a cardholder receives.

Accommodation rewards are particularly idiosyncratic and worthy of a careful second look. It is not uncommon to achieve elite status on a hotel program without spending excessively and within a very short space of time. Knowing this puts you on a path to harvesting benefits like free meals, early check-in, and late check-out.

Reward Hacking

This is a man using his laptop at the airport.

A rewards subculture has spawned many reward experts, some of whom engage in extreme behavior to squeeze the maximum rewards from the available reward plans. While you may not want the lifestyle choices they enter, it is worthwhile to heed their experience, as it is born from a studies approach to the details between different plans.

Some hacker advice includes:

  • Don’t spend for points. Use the card only for expenses that you intend to incur anyway. The alternative is to slip into interest-bearing debt in order to chase lower-valued rewards.
  • Refrain from signing up if you have a chequered credit history. The fees and interest rates will create mounting liabilities for the cardholder who stays in protracted overdraft.
  • Seek and prefer plans with transferable points. This increases your options at redemption time.
  • Plan the redemption of the starter bonus. This is the benefit with the highest payoff, so you don’t want to risk it expiring unused. Conversely, spending more than required to trigger the reward effectively reduces its value.
  • Add a dining program. These are often linked to travel plans, offering an avenue of spend that the cardholder is likely to have required anyway. In addition, some plans offer free air miles simply for linking the dining card.
  • Various issuers offer plans that target businesses, including small business. If you’re the owner of a business, consider signing up for these programs, especially as the business is likely to have a tax exposure very different from its owner’s.
  • Minimize the use of cash. Cultivate the habit of using your credit card and targeting the spend at the qualifying vendors and products.

Points of Prudence

Hacking aside, some basic principles underlie a practical approach to managing travel rewards:

Get Reward Fit

Applying for a credit card when your credit score is poor is not a sound approach. If the application is not denied outright, the card will attract higher interest rates, leaving less flexibility to manage the overdraft.

A poor credit score usually derives from the recent history of mismanaging debt, and it is advisable to first improve your spending and money management habits. This can be done with the help of a finance coach and research of your own. (Reading this post is a fine start).

More generally, get into the habit of planning over a longer horizon and eradicating impulse spending. These behaviors will better incline you to walk the earn-and-burn tightrope described earlier.

Personalized Research

This is a woman doing research on her travel rewards.

It pays to compare cards at the outset. Start with a map of the benefits that matter to you and sort the cards on the basis of which better fits your needs. By way of example, a card with a higher reward rate for dining is not the go-to choice for someone who prefers travel benefits. Have a realistic forecast of your travel budget, married to an honest appraisal of your likely travel choices and benefit preferences.

Consider Nett Value

It is important not to be so blinded by the sheen of a benefit that you do not consider its economic value net of costs. The effective economic value of a benefit does not have to be calculated with any exactness, but rough estimates should be entered.

Since the cards also attract charges, a fee comparison should be taken into consideration. This should include annual fees, the applicable annual percentage rate (if any), and the dispensation regarding foreign transaction fees. Put a monetary value on the perks and add those into the mix.

Manage Difference

Optimizing your card (or cards) is possible only after you’re well acquainted with the terms. In the case of expiring benefits, it is prudent to add electronic reminders to activate them. These should be set to allow enough time for the concomitant spending decision.

Build a Portfolio

It is possible to take out a spread of credit cards. In this case, the optimization strategy should consider the best timing and application for each. Randomly selecting them at the point of payment is a sure way to rob yourself of credit.

Having a variety of cards offers flexibility in spending and increases the permutations of discounted holidays available to the cardholder. In a portfolio approach, not all cards will be used equally, but the marginal cards will play a role in achieving value from time to time.

If you really are a frequent traveler, build a long-term travel plan. This allows you to build a realistic accumulation strategy targeting the costs of the scheduled tours.

Get Advice

This is a woman at the airport about to checkin.

Finally, it is prudent to make a regular review of online ratings and the ranking of reward cards. These ratings, carried out by dedicated firms using strict methodologies, expose you to the evolving range of options, and replace gut feel with a scientific comparison.

This article has provided an outline of the travel reward landscape. By acquainting yourself with the detail of specific offerings, your knowledge will be enhanced and kept current. The various issuers do an outstanding job of providing their terms upfront, and various online evaluators provide comparisons for you to consider.

By being attentive to the full range of options and picking a card or cards married to her own travel preferences, the traveler can save dollars in the long run. These savings parlayed into more travel experience, serve the purpose that makes you a happy traveler, to begin with.

References:

Bank Rate: How do Travel Rewards Work?

U.S. News: Travel Credit Cards

Fly Trippers: Travel Hacking Main Points Miles

Upgrade Points: Travel Beginners

Club Thrifty: How to Travel for Free

Nerd Wallet: Different Types of Points and Miles

Forbes: Top Travel Rewards Tips for 2021

Experian: How to Earn Travel Rewards

Fool: Things to Look for in Travel Rewards Credit Card

Expedia: Cars

Award Wallet: Types of Rewards Points

Finance Buzz: Bank of America Travel Rewards Credit Card Review

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