Are You Better Off Getting Cash Back or Points From Your Credit Card?
If you're an avid credit card user and enjoy accessing the rewards that often come with them, you may wonder sometimes: Is it financially smarter to get a credit card that offers cash back or one that offers credit card points?
There's really no right or wrong answer. If either cash back or points was superior, consumers would have figured that out years ago. Still, if you are debating over credit card rewards or points, you'll want to ask yourself a few questions first.
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How much do you travel? Lou Haverty works in finance in Philadelphia and travels regularly for business. He also runs a website, TheFirstClassTravelGuide.com, which teaches consumers how to use points and miles for travel. So you can figure out what his preference is. But he says that it does come down to what your goals are.
"I've developed a taste for exotic international first-class travel. I just never wanted to pay for it myself," Haverty says. "For me, the best choice by far was to open credit cards with travel points instead of cash. I was actually able to take a two-week vacation around the world to Australia and visit around four continents all while traveling in either business class or first class."
He says that the total cost of the trip would have been around $20,000, if he hadn't had points to take care of it. "I only paid $745 in taxes," he says.
When you travel, are you loyal to a certain brand? If that's the case, then you probably do want a card that focuses on points over cash back.
"A points card really only makes sense if you're extremely loyal to a certain airline or hotel chain, [or] you have a specific use of the rewards in mind," says Kerri Moriarty, a founder and the head of company development at Cinch Financial, a website that makes customized suggestions to people on what types of financial products they should get.
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Do you enjoy math? Depending on what credit card you have, deciphering these point systems and rewards programs can get complicated.
"The golden rule of credit card churning is to redeem points at at least a 1.8 cents rate per mile. If you use a credit card that earns you multiple points for spending in certain categories -- for example, the Chase Sapphire Reserve gets you three points for every dollar spent on dining -- then you can earn 5.4 cents per dollar spent," says John Doherty, a digital marketing consultant in Denver and a regular credit card user. In fact, he has seven credit cards -- and a healthy credit score, he adds.
But did you follow what he said? Some of you probably are nodding your heads, and some of you may be shaking them or passing out from boredom.
If you enjoy those calculations, and some people do enjoy that type of math -- plus the thrill of saving more money than you might have otherwise -- you'll likely do well with points.
Are you organized? With many credit cards that offer rewards, you'll get points or cash back on specific categories every quarter. For instance, in the winter, you'll get extra points or cash back on groceries and gas, and in the spring, you'll get those perks when you spend money at restaurants. In the summer, perhaps you get the rewards when you spend money at movie theaters.
If you're simply getting cash back, you may not feel like you have to pay attention to what categories are offering more rewards.
But you may feel different if you've got a credit card that offers a lot of points -- and you're trying to earn enough to redeem them for airline tickets for that next vacation.
"If you're trying to maximize the amount you can earn with a points card, you often have to think carefully about which card you use on which purchases to make sure you're getting the most bang for the buck," Moriarty says. "For example, if you're earning travel points at a restaurant, you have to remember to use that card and not the one that earns points on travel purchases -- which can be a hassle for the average busy person."
And what can be especially grating is if your rewards credit card has a hefty annual fee attached to it. If you're paying an annual fee of, say, $400, and you aren't using the points in any meaningful way, then you're likely wasting $400 a year.
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Is cash important to you? That can sound like a stupid question. Money is obviously important to everyone. But if you don't travel much, and even if the points are worth more than the cash, you may prefer getting the green stuff back. If you're getting, say, 3 percent cash back, it is like getting a 3 percent discount on everything you purchase (as long as you pay off your credit card in full every month), and you may like the simplicity of that. After all, you can't pay the electric bill in points (but you can pay the electric bill with a credit card to earn points).
"For most people, the smarter -- and simpler -- approach is to go with the cash back card," Moriarty says.
Brian Day agrees. Day is the director of digital products at CO-OP Financial Services, a financial technology company based out of Rancho Cucamonga, California, that serves 3,500 credit unions across the country.
"Study after study continues to show that consumers prefer cash back," Days says. "Consumers can easily see the value obtained by redeeming for cash (In a standard program, I know that 2,500 points gets me $25 worth of cash)."
So you might wonder -- if more consumers do, indeed, prefer cash back more than points -- why do credit cards make such a big deal in advertising and marketing about their points? It isn't just that some credit-card-savvy consumers can make out like a bandit with points. It's because of its perceived value from the credit card issuer, Day says.
"If I'm at a financial institution, I would prefer that the cardholder redeem for merchandise or travel because there is more of a lasting impression when a consumer recalls a memory created on a trip or uses a product they bought through rewards. Nobody says, 'Remember that $50 I redeemed for?'"
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