The Lowdown on Credit Cards Rewards…Is Cash Back Still King?

Cash back has long been considered the ultimate of all rewards card options. But the popularity of points- and miles-earning cards has left many wondering if cash back cards are still the way to go. The best answer: it depends on your lifestyle, the purchases you make with your credit card and what type of rewards are most attractive to you.

Cash Back Credit Cards

The most compelling advantage of cash back cards is that by making the purchases you would make anyway, you get a little money back to spend as you wish. However, it’s often not exactly free money.

Check to see if the annual fee is worth it. If the fee is more than the cash you’d get back each year, you may be better off with a card that has a lower annual fee, cash back or not. And beware of falling into the trap of shopping just because you’ll get cash back. The amount of money you typically get relative to each purchase is low, so it’s best to think of the cash back as a bonus, not a reason to shop.

With a cash back card, the amount of cash you get is usually expressed as a percentage. For instance, 2% cash back translates to 2 cents per dollar spent. Some cards will give bonus percentage points in specific categories–such as gas, groceries or purchases at certain stores—that often rotate each quarter. If you spend most of your money in these categories, each dollar you spend can be worth 3, 5 or even 10 cents extra cash, which is great. If you typically spread your spending across several categories, a card that gives you a decent percentage of money back consistently on all purchases may be preferable.

Miles/Points Travel Credit Cards

If you love to travel, a card that gives you miles or travel points may be the best bet for you; many of these cards offer frequent travelers more value than cash back cards. Typically, you earn a certain number of points per dollar spent with the card. Depending on the card, these points can be redeemed for airline miles, hotel stays or other travel expenses.

Points and miles can be thought of as a form of currency. That is, they can be used to obtain goods or services. Therefore, the value of each point or mile is important. If a card gives you 2 points per dollar spent and 40,000 points is redeemable for a plane ticket worth $600, you’re getting 1.5 cents of value per dollar spent: an okay deal. If a card gives you 2 points per dollar spent, but 40,000 points is redeemable for a $200 plane ticket, you’re getting ½ of a cent of value per dollar spent, which may not be such a good deal.

With travel cards, perks can make all the difference between a great card and one that’s so-so. If the perks offered (such as waived baggage fees, better plane seats or access to an upgraded lounge) are particularly useful or attractive, this can make a card worth more to you than the value of each point or mile alone. Similarly, whatever flexibility the card offers regarding point redemption can tip the scales. For instance, a card with points that can be redeemed for a flight or a hotel could be favorable over a card with points that can only be redeemed for flights.

Keep in mind that for most of these cards, the value of points or miles fluctuates. For instance, the 5-star resort that cost 60,000 points per night last year might cost 75,000 points per night this year. With cash back, although the value of currency changes as well, you can probably count on a more consistent value than you might with points or miles.

Other Points Credit Cards

Other rewards cards let you redeem points for store shopping credits, gift cards, goods like gas, or purchases of a particular brand of products or services. Like any other type of rewards card, start with where you spend most of your money each month and figure in the value of points to help you determine if one of these cards is a good fit.

Make Your Comparison

So, how to best compare cards in order to make a decision? Creating a chart like this will make it easier.

Many people carry more than one type of rewards card. Using a certain card for some purchases and another card for others will help you maximize your cash back and points. And there are entire websites and blogs devoted to evaluating rewards cards, so be sure to check some of those out for information you may not have considered.

No matter which type of rewards card you choose, having a checking account makes paying that card much easier.

Cynthia Kolko, The Summit Federal Credit Union

Sign up for an online checking account – a new way to bank!