How To Decide Between Cash Back or Rewards Points

Written on June 2, 2010 – 7:39 am | by Alicia Ross

Even though credit card issuers are cutting back perks of rewards credit cards, there are still generous rewards cards out there worth their plastic. Rewards credit cards boil down to two basic categories: cash back and rewards points (or airline miles). You could choose a card based on its offerings—money in the bank versus points/miles—but the card’s earning potential, redemption value, and your own spending habits are crucial factors too. Let’s compare cash back and rewards points cards.

	Cash Back	Rewards Points
Advantages	It’s money direct to your pocket, and can earn you more in a savings account Can be redeemed for anything rather than pre-determined products or services Generally fewer restrictions and limitations than points/miles program Can’t be devalued because a dollar will always equal a dollar Cash back on every purchase If issuer cuts back rewards cards, they can’t diminish the cash back you’ve earned	Programs offer special bonuses and offers, like double points or discounted gift cards, that gives better return than if using cash Rewards, like travel packages, you can’t get anywhere else It’s really a reward – spoil yourself with a vacation or new toy Access to exclusive events, travel packages, complimentary concierge, travel upgrades, and other perks unique to each card Many cards offer bonus points or mileage as introductory offer
Disadvantages	High cash back rates reserved for specific spending categories Limits to how much you can earn annually Cash back earnings can be on a tier-based system May pay out only once a year High interest rate	Rewards offerings limited to specific products, services, or locations; useless if airline dates are blacked out or catalogue doesn’t appeal to you Catalogues have inflated values, so you use more points than the cash equivalent of purchasing Annual fee Points can expire or have limitations High interest rate

These pros and cons are geared towards what kind of rewards and card terms you are looking for. Your spending habits also make a difference to how valuable the card could be to you. Let’s take a look at how two cards, the Capital One VentureOne, a miles and points card, and the Chase Freedom Card, a cash back card, earns rewards.

Monthly Spending	Capital One VentureOne (1.25 miles per dollar)	Chase Freedom (1% cash back on all purchases; 5% back on special categories)
spend $250	earn 312.5 miles	earn $2.50
$500	625 miles	$5
$1,000	1,250 miles	$10
$10,000	12,500 miles	$100

Looking at the numbers alone, Chase Freedom’s cash back looks like pocket change compared to the mileage you earn with VentureOne. But with rewards cards, oftentimes the value of points/miles has a different worth than cash.

Capital One calculates miles redemption by dropping the last two zeros of accumulated miles to see equivalent travel purchase price. For example, it would take over earned 30,000 miles—or spend $24,000—to get a $300 flight (like a roundtrip trip from San Francisco to Los Angeles), and it would take about 15,000 miles—or spend $12,000—to redeem for a $150 hotel room.

Between these two cards, it would be practical to go for the rewards points/miles card IF you carry a large balance to accumulate enough points to redeem for something worthwhile. But if you know you carry a small monthly balance, points virtually have no value until you accumulate tens of thousands of points, which could take years. Even if you aren’t a heavy credit user, with a cash back card, you could still earn some money.

Every cash back or rewards points card vary in their terms and offers. The key question is really about your spending habits and whether the card’s rewards program maximizes the way you spend and what you want to earn. Whether its points or cash, make sure your rewards are worthwhile and within your reach.

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