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Uh Oh, Should I Have Been Using a 2% Cash Back Card All These Years?

I woke up in a cold sweat over the weekend with this thought: By using a points-earning credit card for my every day purchases, am I flushing money down the toilet?

When you use a credit card (any credit card) to earn points, you are actually buying those points for 2 cents each. How so? There are 2 no annual fee cards that earn 2% cash back on all purchases (Fidelity Rewards Amex and, of all things, the Priceline Rewards Visa). By not using those cards (and I currently do not), you’re forgoing 2 cents on every dollar spent — ie, when you use a different card, you’re buying points for 2 cents each.

I’m not at all suggesting that you shouldn’t sign up for cards for the sign up bonuses — by all means, that makes a ton of sense, even if there’s some minimum spend to hit. And certainly there are cards you should use for specific spending – the Amex Blue Cash Preferred earns 6% cash back on groceries, for example. And for many people the 2X points on the Sapphire Preferred for travel and restaurants can make sense.

But for everyday purchases where you’re just earning 1 point per dollar there are very few scenarios where you’re optimizing your rewards by earning points instead of cash. Let’s take a quick look.

If you’re spending roughly $2,000/month, you’ll earn 24,000 points a year or just about enough for a round trip domestic coach ticket. You’ve given up $500 in cash for that – in most cases, not a particularly good deal. Coach ticket to Europe at 60,000 miles? $1,200 in missed cash back, in many (though not all) cases enough to pay for at least 1 ticket to Europe.

The equation changes a bit if you’re looking at complex premium cabin itineraries — a business class ticket to Asia will “cost” you $2,000, much less than actually purchasing a ticket outright (though you may reconsider flying in business if you knew it was costing you $2,000 vs. $1,000 to outright buy a coach ticket).

With the Starwood Amex card the numbers change a bit because you’re earning 1.25 airline miles per dollar spent (with the 5,000 point transfer bonus). It’s costing you 1.6 cents per point (though it’s still costing you 2 cents when you redeem at a Starwood hotel, unless you’re booking the 5th night free).

My point here isn’t that everyone should use a 2% cash back card for everyday spend – it’s that you should look at your planned spending habits and see if it makes more sense to earn points or cash. I know plenty of people who have a $90/year airline credit card and put $30,000 worth of spend on it – in nearly all cases that’s a terrible idea. You need to do your own calculations and decide. But actually go through that exercise, you might be surprised to find out you need to switch your spend strategy.

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  1. lolz. must get a cash back card!

  2. I have a tough time valuing certain miles above 2¢, so I only use my mileage cards when I’m earning double miles (like when purchasing travel charges with my CSP). Otherwise, I use cash or cash-equivalent points.

    I was explaining to someone why I use my Citi Forward (5x TYP, worth 5-6.65¢) for dining rather than my CSP (2.14x UR). They looked at me as if I was nuts. However, I don’t value a UR point >2¢ …

  3. It is interesting how the sexy promise of travel gets people to use airline cards instead of getting cash back. I would think that for by far the majority of folks the 2% cash back is a better, clearer, more simple deal.

    I do somewhat disagree with you about the amex grocery card. For a $75 annual fee, you are getting an extra 4% cash back on $6000….so you are making $165 per year. Unless you already have the card, I am not convinced that is worth signing up for and foregoing some other large signup bonus. — Even more so when the reality is that many of us spend much of the year meeting minimum spends, including at grocery stores and hence may not even reach the $6000 on that card.

  4. by the way, lately your site has been very very slow. I thought I would mention it or ask about it. It has gotten worse over the last month. What are you hosting it off your home computer or something? :mrgreen:

  5. I had the same experience a few months ago!

    After a couple of years of points-and-miles obsession, my head finally cleared.

    All non-minimum, non-heavily bonused spend now goes on a 2% cash back card.

  6. It looks like the current Priceline card offer is 1 point per dollar, which appears to be 1% rather than 2%.

  7. Comin’ late to the party, but thought I’d add my view. I can’t come up with the actual money to buy tix. I mainly only fly ATL to LAX to see family, but am too old (well, not really) and crotchety (fer shure!) to fly less than biz class. So, I use my Ink Bold (and at Costco, my Delta AMEX) to rack up points. I CAN spend points on travel, but the money isn’t there. It’s another view.

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