Credit card rewards present an opportunity to extract additional value from your routine purchases. However, before reaping these benefits, a crucial decision arises: Should you opt for a cash back card or one based on points accumulation?
Although there isn’t a definitive singular answer regarding the superior credit card rewards, one type of card might better suit your preferences. To streamline your decision-making process, we outline the advantages and disadvantages of each type below.
What constitutes cash back on a credit card?
In the realm of credit card cash back, you essentially receive a refund on your purchase, typically averaging around 1-2 percent. Some credit card issuers offer a flat-rate cash back across all spending, while others structure tiered rewards, especially within specific spending categories. These categories usually encompass everyday expenses like fuel, groceries, and dining.
Upon redeeming your rewards, most issuers enable cashing in through a credit statement. Certain providers might extend the options to deposit funds directly into a bank account or issue a check by mail. Regardless of the chosen method, the outcome remains consistent: a financial return directly to your pocket.
How do credit card reward points function?
When using credit card points, a specified number of points is typically earned for each dollar spent. These accumulated points can then be redeemed through the issuer’s rewards program for various purchases. Generally, points are redeemable for travel expenses or can be utilized for purchasing items such as gift cards.
However, the significant distinction with points-based cards lies in the lack of a consistent redemption value. In contrast, with a cash back card, the value of rewards remains consistent. Yet, the worth of a point can vary significantly depending on the method of redemption.
Advantages and disadvantages of cash back cards Advantages: Simplicity: Cash back programs offer a straightforward rewards system. Some issuers even provide an automatic redemption feature upon reaching specific earning thresholds. Limited annual fees: Unlike points cards, cash back cards often have minimal or no annual fees.
Disadvantages: Modest sign-up bonuses: Owing to the absence of fees, the welcome bonuses offered by cash back cards tend to be smaller compared to those presented by other credit cards. Few additional perks: Cash back cards usually lack extensive reward programs beyond the potential for purchase rebates.
Pros and Cons of Points Cards
Pros:
Generous sign-up bonuses: Travel-focused credit cards often present substantial welcome bonuses, frequently offering rewards worth hundreds of dollars, particularly upon meeting specific initial spending requirements.
Travel-related benefits: Many points cards come with membership perks, such as airport lounge access or the absence of foreign transaction fees.
Cons:
Cumulative annual fees: The expenses associated with annual fees for points cards can mount up, sometimes reaching several hundred dollars per year.
Variable points value: The redemption methods and value of points can differ across issuers, necessitating further exploration to optimize the value of accumulated points.
Selecting the Right Type of Card
“When deciding between a cash back or points card, consider your rewards objectives,” advises Molly Ford-Coates, founder and CEO of Ford Financial Management in El Paso, Texas. “Do you currently need additional cash, or are you inclined towards travel experiences?”
Generally, if you infrequently travel and prefer a more straightforward rewards process without much involvement, a cash back option might be more suitable. However, if you plan to travel at least once or twice a year and are willing to invest effort in comprehending and utilizing the issuer’s rewards program, a points-based card might better align with your preferences.