Cash Back vs. Miles: Which Credit Card Perk Should I Choose?
Last year my parents casually mentioned that it could be their last Christmas in the home they have lived in for nearly 50 years — the house I grew up in — as they would be putting it up for sale in the spring. I hadn’t planned to visit them over the holidays, but I quickly went online looking for tickets. My heart sank when I saw airfare was quadruple what I normally pay to fly from Florida to Michigan. It seemed hard to justify paying that much for a weekend visit. Then I remembered the bonus miles I had earned by getting a new travel rewards credit card and quickly cashed a good chunk of them in for a ticket.
I had a wonderful time and was glad I went. And I was thankful I had accumulated the travel rewards that made it possible.
When it comes to rewards credit cards, you have a lot of choices. And part of the decision-making process involves deciding which type of card is better. Two of the most popular types of rewards, by far, are cash back and travel rewards. Is one better than the other?
The Case for Cash Back
There are compelling reasons for choosing cash as your reward. The main one is obvious — everyone can use cash! Here are some more.
Very generous rewards. Some cards give you as much as 6% cash back in certain categories such as groceries, gas, restaurants, etc. Sometimes these higher payouts apply to specific types of purchases all year long, while in other cases, categories rotate (usually quarterly).
Cash is a flexible reward. Cash back should probably get the award for the most flexible reward. After all, you can spend it on anything you like: travel, entertainment, or anything else you can imagine. There’s no other reward that offers that degree of flexibility.
Cash in multiple ways.
Most issuers allow you to “cash in,” so to speak, in a variety of ways. For example, with the Citi Double Cash MasterCard, which was recently named the Best Cash Rewards Credit Card in America, once you have accumulated at least $25 in cash rewards, you can redeem them for a check, a statement credit or a gift card, or you can request funds be deposited into a linked Citi savings or checking account, or certain linked checking accounts.
Abundant no-fee options. If you absolutely hate paying an annual fee, a cash-back card can be just the ticket. There are many cards in this category that carry no annual fee; in fact, none of the 2015 Best Cash Reward Credit Cards picks charge one. If you pay your bill in full, you truly get something for nothing here.
But Wait… But there can be a few downsides to these programs. Some cap the amount you can earn, usually in specific categories with higher rewards. So, for example, with the Discover It card, you can earn unlimited 1% cash back on all purchases, but you can get 5% cash back on purchases in certain categories. 5% cash back applies to the first $1,500 in spending in those rotating categories each quarter. And a cash-back card can sometimes feel, well, unrewarding. If you put your earnings toward a statement credit or spend it on something you’d buy anyway, it may be a little bit of a letdown since you haven’t used it for something special or memorable.
The Case for Travel Rewards
Travel reward cards may offer a variety of perks, from airline miles that can be used to purchase tickets for flights, to free hotel stays, free checked bags, priority status with airlines or hotels and more. Here’s why one of these cards may be your best choice.
It will force you to take a vacation! If you’re one of the 40% of Americans who don’t use all their paid vacation days, accumulating travel points may give you that extra nudge you need to actually go somewhere. Miles or points can also be useful for trips where the out-of-pocket cost is high, but the number of miles needed isn’t.
Upgrade to luxury. Many travel rewards card aficionados use their miles to take trips that would normally be out of reach, such as international flights in business or first class. These adventures may often be ones you wouldn’t want to bust your budget to pay for, but that become great memories over time.
Save big bucks. Some co-branded airline credit cards can save you a lot of money on checked luggage fees, and can be particularly valuable for families who travel together. For example, the Citi Executive/AAdvantage World Elite MasterCard card from American Airlines offers one free bag for the cardholder and up to eight companions.
Many of the most lucrative travel rewards cards charge hefty annual fees of at least $75, to as high as $400 or more. (Many times, however, the fee is waived the first year.) Additionally, you may need excellent credit to qualify.
Before You Choose
No matter which type of reward card you choose, take the time to check your credit scores before you apply to find out where you stand. (You can get two free credit scores updated monthly at Credit.com.) Then take some time to think about which reward you are most likely to use so you can choose a credit card you are likely to use for the long haul. While switching credit cards is fine every once in a while, frequently opening and closing new accounts can negatively affect your credit scores. “I would say that travel rewards are best for premium class international travel and by those who enjoy finding the value of these systems, and have flexible travel schedules,” says credit card expert and Credit.com contributor Jason Steele. “For most others, I think cash back offers the best value.” Still undecided? Get them both. You can get a cash-back credit card and a travel reward cards and use each to earn maximum rewards. For example, if you’re feeding a large family you might choose a cash back card with higher rewards for purchases at grocery stores. Max out those rewards then use the travel rewards card with free checked bags to save big bucks on your next vacation. Take some time to analyze how you use your card to figure out which combination works best for you.
Note: It’s important to remember that interest rates, fees and terms for credit cards, loans and other financial products frequently change. As a result, rates, fees and terms for credit cards, loans and other financial products cited in these articles may have changed since the date of publication. Please be sure to verify current rates, fees and terms with credit card issuers, banks or other financial institutions directly.
This article originally appeared on Credit.com. This article by Gerri Detweiler was distributed by the Personal Finance Syndication Network.