Rewards cards get marketed like a cheat code: spend money, get free money back. That pitch isn’t exactly wrong, but a lot of the specifics people believe about how rewards actually work are off, and the gap between the myth and the reality is where a lot of cardholders end up losing value they thought they’d banked. Here are six of the most common ones, and what’s actually true.
Myth 1: Rewards are basically free money
Cash back and points are real value, but they’re a rebate on spending you were already going to do, not a bonus on top of nothing. The math only works in your favor if you’re paying the statement balance in full every month. Carry a balance and the interest charge (credit card APRs commonly run from the high teens into the high 20s, depending on the card and your credit) will wipe out a 1-2% cash back rate in a matter of weeks. A card that pays you $3 back on a $150 grocery run isn’t doing you any favors if it also charges you $20 in interest because you didn’t pay it off.
The honest way to think about it: rewards are a small discount for people who were already going to pay on time and in full. If you’re not reliably doing that, the rewards rate is close to irrelevant next to the interest you’re paying.
Myth 2: You need excellent credit to get any rewards card
Premium travel cards with big sign-up bonuses and airport lounge perks do generally want good to excellent credit, often cited as a FICO Score around 670 and up, and the best offers skew toward people closer to the top of the range. But “rewards card” isn’t synonymous with “card for people with great credit.” There are cash back secured cards built specifically for people with fair credit or no credit history yet, where you put down a refundable deposit and still earn a modest cash back rate while you build a track record. The rewards are smaller and the categories are usually simpler, but they exist, and they’re a reasonable way to build credit without giving up on earning something back on everyday spending.
Myth 3: A point is a point, roughly worth a penny
This one trips up a lot of new cardholders who assume every rewards program values its currency the same way. In practice, the value of a point or mile swings a lot depending on the program and how you redeem it. Statement credits and gift cards tend to land on the lower end. Transferring points to an airline or hotel partner and booking a specific flight or room can be worth meaningfully more per point, sometimes two, three, or more times a flat cash redemption, if award space is actually available and you’re flexible on dates. The catch is that transfer partner redemptions take more research and some tolerance for award charts that change without much warning. There’s no universal rate. Before assuming a redemption is a good deal, check what cash back or a statement credit would have gotten you for the same number of points, and compare.
Myth 4: Cash back counts as taxable income
This is genuinely one of the more confusing corners of the tax code, mostly because the answer depends on how you earned the reward. Cash back and points you earn by spending money are generally treated by the IRS as a rebate or discount on the purchase, not as income, the same way a coupon isn’t taxable. A sign-up bonus that required you to hit a minimum spend threshold falls into that same bucket.
Where it flips is rewards you get without spending anything, like a referral bonus for getting a friend to apply, or a bank account opening bonus. Those are generally considered taxable income, and issuers may send a tax form once you cross a reporting threshold (the dollar threshold for that reporting has been in flux in recent tax years, so don’t assume last year’s number is this year’s). You can still owe tax on a reward even if you never get a form for it. None of this is a substitute for actual tax advice, since your specific situation and the current rules matter more than any general rule of thumb, so when in doubt, run it by a tax professional.
Myth 5: Your rewards balance is safe until you decide to use it
Points and cash back sitting in your account feel like a balance in a savings account, but they’re usually not protected the same way. Most issuers will let unredeemed rewards expire or forfeit if you close the account, miss payments badly enough that the issuer shuts it down, or let the card sit unused for roughly a year (issuer policies vary, but somewhere around 12 months of no activity is a common trigger). Returning an item you earned rewards on typically reverses the reward too.
If you’re thinking about closing a card, redeem what you’ve got first, or ask the issuer whether there’s a grace period or a way to move points to another open account before you pull the trigger. A quick recurring charge, like a small subscription, is an easy way to keep an otherwise-unused card active enough that its rewards don’t quietly vanish.
Myth 6: Cashing out is always the safe, smart choice
Cash back feels like the responsible option because it’s simple and guaranteed. That’s a legitimate reason to pick it, especially if you don’t want to deal with award charts or you redeem rarely enough that it’s not worth learning a program’s quirks. But “safe” isn’t the same as “best value.” If you travel with any regularity and you’re willing to put in a bit of research, transferable point currencies can often be redeemed for more than their cash-out rate, sometimes considerably more. The tradeoff is real: transfer redemptions take more effort, availability isn’t guaranteed, and programs do devalue over time. Neither choice is wrong. The myth is treating one as universally correct without checking what your own spending and travel habits actually call for.
Frequently asked questions
Do credit card rewards points expire?
Often not while the account stays open and in good standing, though airline and hotel loyalty points frequently do expire after a period of inactivity, commonly in the one to two year range depending on the program. Closing the card is the bigger risk: many issuers forfeit unredeemed cash back or points when an account closes, so it’s worth redeeming or asking about a grace period before you cancel.
Is credit card cash back taxable?
Cash back and points earned by spending are generally treated as a non-taxable rebate, similar to a discount. Rewards earned without any spending requirement, like referral bonuses, are generally treated as taxable income. Rules and reporting thresholds can change from year to year, so check current guidance or ask a tax professional if you’re unsure how a specific bonus applies to you.
What credit score do I need to get a rewards credit card?
The most competitive travel and cash back cards generally look for good to excellent credit, often cited as a FICO Score of roughly 670 or higher. That said, there are secured cash back cards designed for people with fair or limited credit history, so a lower score doesn’t rule out earning some rewards while you build credit.
Should I carry a balance to earn more rewards or help my credit score?
No. Carrying a balance doesn’t earn you extra rewards, and it doesn’t help your credit score either. It just adds interest charges that typically cost far more than any rewards rate pays out. Paying your statement in full each month is what lets rewards actually work in your favor.
What happens to my points if I close my credit card?
This depends on the issuer, but unredeemed points, miles, or cash back are commonly forfeited when you close an account. Some issuers offer a window to redeem first or a way to transfer points to another card you’re keeping open. Always check before you cancel, and redeem down your balance if you can.
Rewards programs, APRs, credit score requirements, and tax rules all referenced here are general ranges and common patterns, not fixed numbers; the details vary by issuer and card and do change over time. Always confirm current terms directly with your card issuer, and talk to a tax professional about how any specific reward applies to your own return.
