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Deciding Between A Cash Back Card and a Points Card

In the comments from last week’s post about credit card strategies for low-to-average spenders, I noted that (outside of signup bonuses) the miles you earn on credit cards are not free – you are paying for them by not getting cash back. I think is an important point, and I wanted to call it out beyond the comments section.

I mentioned the Fidelity Investment Rewards Amex, which offers 2% cash back on all purchases. By choosing not to have this card, you (and I, as I don’t have that card either) have made the decision to forgo 2% cash back on all purchases.

Let’s look at the numbers:

Assume for a moment that you spend $7500/month on your everyday card. That’s significant spend, and you’d end up with 90,000 points in most programs after a year. In my case, I’d have that in Starwood since I have the Amex SPG card. I could keep those in SPG or transfer them to an airline for 110,000 points. But let’s also look at putting that on the Chase Sapphire Preferred, since that’s a favorite of many. I’ll even assume there that you’ve got 25% of your spend at travel and restaurants where you’re getting double points. Add in the 7% end-of-year bonus and you’ll have 120,375 Ultimate Rewards points.

A cashback card would earn you $1800 cash at the end of the year.

Let me put it out there: Those 120,000 points (or 110,000 miles) you earned are not free. You bought 120,000 points for $1,800, or 1.5 cents per point. Maybe that’s a good deal depending on how you use them, maybe that’s not. But it’s not free, and we should stop referring to them as free.

I had argued in the post last week that for low-to-average spenders, a cash back card is preferable as your everyday card to any points earning card.

I’ve thought more about this, and I think that, depending on your travel patterns, many others are also better off with the 2% cashback card than with a points-earning card as your everyday card. (Don’t confuse this with getting a card for the signup bonus – you should absolutely be getting different cards for signup bonuses, assuming your credit score can handle it and you’re paying off the balance). I’m talking about which card to use when you’re not trying to meet the minimum spend for a bonus.

I know this is heresy among the travel bloggers out there, and like I said, it’s advice that I have not been following. But when I did the math, the choice of cashback card vs. points card wasn’t so obvious.

On the upper end of how you can use those points, it can be a good — or even great –deal. Those Ultimate Rewards points can be turned into 4 nights at the Park Hyatt Paris-Vendôme, with a value of $4,000. Effectively you’re getting the hotel at half price. 110,000 miles in several programs will get you a business class ticket to Asia, which can cost upwards of $8k (though it may also be $4k on the bottom end). Again, you’re getting pretty good value there, assuming those are the types of ways you’d use those miles.

(Though another way of looking at it is that you could buy 2 coach tickets to Asia for $1800 rather than the 1 business class ticket you’d get with the miles. I know many can’t imagine flying in the back to Asia, but for lots of other people 2 tickets in coach will suffice).

Plenty of travelers, though, don’t use miles for business class tickets to Asia. Maybe they’re using the points domestically to take their family to Florida. You’ll get 4 tickets to Florida with those 110,000 miles, meaning the tickets cost you $450 each. Not great.

Or maybe you’ll head to the Caribbean – on some airlines you’ll be able to get 4 tickets there with the 120,000 miles (though on others you’ll only get 3 tickets). Again, they’ll cost you $450 each. Perhaps that’s a bit better, but it’s not at all a free ticket. It’s a $450 ticket.

To sum up:

First, there is almost no reason to have an airline-specific card as your daily card. Why would you take 1 point per dollar spent (what you earn from nearly all airline cards) when you can get 1.25 miles through SPG usable on a bunch of airlines or the 2X bonus on travel and restaurant spend on the Sapphire card? I can’t think of any scenario where you are better off with an airline card as your everyday card than you are with SPG or Sapphire. It may still be worth getting the United Explorer card to get the Elite-style benefits, sure. Just don’t put your spend on it.

Second, the choice of whether you choose cashback or a points card really rests on how you plan on traveling. You are tying up a fair amount of money in a points program by putting your spend on one of those cards. If you have ambitious travel plans, then by all means it will be worth it to you. But you really have to think about how you spend those points. Most people are not doing business class flights to Asia, with a stopover and one way via the Atlantic and one via the Pacific. If you are, awesome – your choice is obvious. But do you find your points going to flights to San Diego? I’d step back and do the math.

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13 Comments.

  1. Cash in the bank is cash in the bank, the money from that cash back card can be put to work immediately rather than saving miles/points for a potentially long time to earn a reward.

    A possible exception for using airlines cards for everyday use are the Delta Amex’s with MQM boosts: those who would end up spending money on airfare deliberately to get those 10k/20k MQMs for 25k/50k annual spend might consider using those cards despite their weak regular earnings. Depending how they value elite benefits and what mileage bonuses they earn for flying with that status, this can make sense.

    So much of the coverage outside your excellent blog seems to assume either elite status is irrelevant, or, the opposite, that elite status magically falls from the sky every year. It matters to a lot of people and is not easy for everyone to achieve.

  2. This was a great post and something that does often get overlooked. Have to admit that I also do not follow that advice as I have a hard time using a credit pull to get the 2% card when I’m concerned with getting big mileage signup bonuses.

    As Gary says though, a big part of the appeal in points is the aspirational awards. I think that can be true regardless of how you define aspirational rewards. For some, that may be first class and hotel suites. For me it amounts to trips in coach class, though many more trips than I would otherwise be able to afford. Even in coach I tend to get more than $0.015 per point in “value” but if I were spending cash, I may not be taking that trip.

    Like you said, doing the math can definitely point towards a cashback card for many, but it’s so hard not to fall in love the miles.

  3. You make some excellent points which I hope encourages readers to take a minute to evaluate their own card choices. I don’t believe there is a “one size fits all” decision, and like Rapid Travel Chai, can think of a few scenarios where spending on an airline-specific card may make more sense than SPG, Sapphire, or even a cashback card (for example, working toward a companion pass). Regardless, this post is great food for thought.

    As a low spender, most of my credit card spend goes toward signup bonuses, with the rest on cashback cards (strategically in categories offering 5%).

  4. Why You Need to Book Business or First, and 5+ Star Hotels - pingback on January 9, 2012 at 5:08 pm
  5. Excellent post. I think this really improves on the discussion from the previous one.

    Comparing 2% cash back to redeeming Ultimate Rewards points @ 1.25 cents per point doesn’t make sense, 2% cash back is always better than 1.25% cash back that can only be used on travel.

    The key point here is that whether cash back makes sense vs miles depends on how you use your miles, or more importantly, how much you value what you get for your miles.

    If you aren’t willing to spend say $2000+ for a first class ticket to Asia, then you shouldn’t be putting spending on the card that foregoes that much cash.

    BUT I still think the one piece that’s missing in the equation is to compare cash back versus miles earned via a credit card that TOP OFF an account.

    Your analysis began in the earlier post with a low spender. Take that same low spender. They might put 24k on their card in a year, foregoing $480 in cash back. But the 30k points they earn might put them over the top for that first class ticket to Asia. The question is, at the margin, does it make sense for them to buy miles at through their credit card (vs foregoing cash back) in order to get this award? That’s the real world question folks face when they earn miles from a variety of sources, one of which is a credit card.

    • Thanks, Gary. The issue of the top off is interesting. I really don’t know how to value that. That flexibility is valuable (I’ve certainly used points like that many, many times). I just don’t know how to value it. And it adds another layer of complexity to the whole decision. I’m not saying it’s worthless, I’m just saying that I’m not sure how people can decide the value of having top off flexibility.

  6. Spending to reach a topoff is the same as spending to hit a minimum spend. it’s spending you “have” to do to make the card worthwhile.

  7. Excellent points all. I use the SPG Amex card and an Amazon Chase Visa (I think of that as cash back since you can buy virtually anything at Amazon.) But now that I see Jared’s point that my miles really aren’t free, what is a good cash back card that is not American Express since I already have a Starwood card? I need to compliment it with a Visa and maybe one linked to cash back rather than Amazon is the way to go. I appreciate any suggestions. I thought the Chase Sapphire would do the trick but read above by a poster that you can only use cash for travel – I thought you could opt for actual $$$.

  8. That’s why I always try to have enough spend requirements to last me until my next round of CC applications. Because only the signup bonus is free.

    Daily spend is opportunity cost between CB or Rewards.

    My Spending habits as a recent college graduate are not high enough to outpace the min spends anyway.

    That’s my strategy! Thanks for sharing yours.

  9. I like the article. The goal of trying to optimize your CC rewards should be to add the best value to your life, not collect the most points. Like you said, some people like flying first class to Asia and some people just want to take the family to Florida.

    Another way to look at points vs. cash debate is how having points vs. cash is how getting the rewards affect how you use them. In my case, if I get a cash rebate on my CC bill, I’m likely to save that money or apply it to everyday purchase I already make. But if I get airline miles or travel points, I HAVE to spend them on travel, almost forcing myself to travel. So I’ve been switching my reward cards towards travel, because I’d like to travel a bit more in the coming years.

  10. this is a good post. I think cash back cards are better for many people. I have the fidelity and it is better than most miles cards in my opinion, except the SPG and except the sapphire for travel and dining spend. if you have a card that earns better than 2 pct then it is potentially even better than those two.

  11. Yes, very interesting discussion! I also would like to know of a Visa/MC that gives 2% cash back at all times! I was going to keep both (wife & me) of our Capital One Venture cards but now I think I won’t do it. I will also keep 1 of the 2 Chase Sapphires. And keep hitting the big promos for getting new cards. An additional factor in the discussion should be the personal satisfaction for increasing miles/pts balances & booking award trips of a lifetime…Cold hard cash (although very welcome) is just not that much…FUN:-)

  12. I use the BA card as an every day card. It earns 1.5 avios per dollar and the majority of my flights are from Toronto to Chicago to see family, flights that cost 9000 avios or ~$500 dollars. In my case, spending $6000 can get me either $120 in cash back or 9000 avios…avios win hands down!

    You make a lot of good points though that we don’t hear often in this community…

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