Cash Back vs Travel Rewards: Pick the Right Credit Card for You
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Should you earn cash back rewards or travel rewards from your credit card? Frankly, it is a question that is nearly as old as reward cards themselves, and the answer has always been "it depends." Here's a breakdown of the ins and outs of the world of rewards credit cards. Now, you can decide which one will get you the biggest bang for your credit card buck. (See also: Ask These 7 Questions to Choose the Perfect Credit Card)
Of course, you need to be aware that rewards are only rewarding if you pay off your balance in full each month. Otherwise, the interest that you accrue on your balance will always be much more than the rewards you're gaining.
But if you're itching to get into the credit card rewards game, here's everything you need to know.
When You Should Choose Travel Rewards
Earning and redeeming travel rewards can be extremely complicated, so the ideal reward card user should be someone who is willing to put in the time and effort to deciphering their favorite airline and hotel programs. While earning free travel sounds like an amazing deal, some cardholders may find it frustrating trying to redeem the miles or points they've accumulated.
Earning Travel Rewards
Most travel rewards credit cards will offer bonus points or miles for spending in travel categories, like airfare, car rentals, hotel stays, dining, and entertainment.
Value of Travel Rewards
Travel rewards offer the opportunity to get a higher value for each mile or point earned. Rewards are most valuable when redeemed for international flights in business class, expensive last minute flights, and luxury hotels. These points and miles are less valuable when used for domestic flights in economy class, especially when travelers have the ability to book flights with plenty of advanced notice. (See also: These Credit Cards Have the Best Travel Redemption Value)
But when points and miles are redeemed strategically for high value award flights and luxury hotel stays, then it is often possible to receive three to five cents in value per point, which is much better than the best cash back reward cards.
Redeeming Travel Rewards
The opportunity to redeem award travel is different depending on the credit card and loyalty program it is connected with. Some credit cards guarantee no blackout dates or restrictions when booking an award flight or stay. Others only offer a limited number of seats or stays for those redeeming rewards. Others, still, will simply allow you to redeem a statement credit for any travel purchase you make. How you prefer to travel will be the determining factor for which program to join.
Co-branded airline or hotel cards will allow you to directly use your miles to redeem award flights or stays through the loyalty program connected to the card. Many times you can book travel with their partner airlines and chains as well. General travel cards might require you to book travel through their portal or allow you to transfer points to the available programs.
It can be very hard to redeem airline miles for flights during peak travel seasons, so these programs are not very well suited to those who only travel during the holidays. Furthermore, some avid travelers who have particular travel requirements aren't very well served by traditional airline frequent flyer programs. For example, someone who wants to take shorter flights on routes with healthy competition will never receive much value from 25,000 miles on a flight that might only cost $100-$200. In addition, large families will usually be frustrated in their attempts to find more than two or three award seats available at the lowest mileage levels. Also, those who don't like to stay in large, chain hotels aren't going to have much use for hotel points. Finally, those whose schedules preclude searching for award seats months in advance will also find their miles to be less valuable.
A big benefit of travel rewards cards are the included travel perks. For frequent travelers (or those who simply hate the discomfort of travel), perks like priority boarding, status upgrades, lounge access, and free checked bags may prove to be valuable on its own.
When You Should Choose Cash Back
For many credit card users, even some who love to travel, cash back credit cards remain their best option. First, you can always use cash back to pay your rent, mortgage, or other bills, something that is impossible to do with airline miles or hotel points. In addition, you can save and invest your cash back, which allows it to grow over time. In contrast, frequent flyer miles and hotel points invariably lose value over time as companies change their award charts. And while some travel rewards cards offer points redeemable for travel purchases, if you don't end making travel purchases, you may not be able to use your hard earned points at all.
Earning Cash Rewards
Many cash back cards offer bonus points in general shopping categories, like groceries, department stores, and gas. They may also have a shopping portal that offers extra points for shopping with their partner merchants.
Value of Points
While the best travel hackers are able to get anywhere from three to five cents per point, cash back points usually have a one cent per point value. While the opportunity for point value is lower, cash back programs are simple and cardholders are guaranteed a predictable rate of return from their credit card rewards, without having to decipher loyalty programs or search for award availability. For those who have trouble redeeming their travel rewards, they run the risk of getting no value from the points they've accumulated.
Redeeming Cash Rewards
Redeeming your cash rewards is usually as simple as getting a statement credit or direct deposit into your account. Some require a minimum amount before redemption. You may also have the opportunity to redeem gift cards or products. (See also: 7 Biggest Credit Card Redemption Mistakes)
Reward credit cards offer valuable points, miles, and cash back for your spending, but choosing the best reward card is not that easy. By considering the type of travel you prefer, you can decide if travel rewards or cash back card are right for you.
Which Type of Rewards Is Right For You?
Are you the kind of credit card user who wants to sit back and wait for their rewards to accumulate, and then easily redeem them? If so, then you are best off using the most competitive cash back rewards credit card, and then using some of your savings for travel when necessary. But if you are the kind of person who dreams of business and first class travel, or someone who occasionally has to book an expensive flight with little advanced notice, then it might be worth it for you to play the travel rewards game with frequent flyer miles and hotel points.
See our picks for best credit cards:
- Best Travel Rewards Credit Cards
- Best Cash Back Credit Cards
- Best Sign-Up Bonuses for Airline Miles Credit Cards
- Best Credit Cards for Hotel Deals and Rewards
- Best Credit Cards for Groceries
- Best Credit Cards for Dining Out
- Best Premium Credit Cards
- Best 0% Balance Transfer Credit Cards
- Best Low Interest Rate Credit Cards
- Best Credit Cards with Annual Fees
- Best Credit Cards with No Annual Fees