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Cash Back vs. Points: How to Choose the Right Credit Card

The Motley Fool logo The Motley Fool 12/12/2018 Lyle Daly

Not sure if you should go with cash back or points? Find out the advantages of each and how you can choose the right type of credit card.

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The first big decision to make when you’re picking a new credit card is whether you want to earn cash back or points on your purchases. You can’t exactly make a bad choice either way, because both mean you’re getting something back on the money you spend, but you’ll get the most value by choosing the right credit card for your lifestyle and needs.

How cash back and points differ

Cash back and points are different types of reward currencies that credit cards can earn every time you use them.

Cash back is exactly what it sounds like. When you use a cash-back card, you build a cash balance. You could get that cash in the form of a statement credit, a deposit to your bank account, or a check in the mail, depending on the credit card and the redemption method you choose, but it’s cash, all the same.

When you have a credit card that earns points, you can redeem those points through the card issuer’s rewards program. Potential options include:

  • Travel award bookings -- Book airfare or a hotel stay in points.
  • Fixed-rate travel redemptions -- Apply your points towards travel purchases at a fixed rate. For example, a card issuer may let you spend 50,000 points to book $500 of travel.
  • Transfers -- Send your points to a rewards program’s airline or hotel partner, where you can then make an award booking with that partner.
  • Product purchases -- Buy a product from the rewards program’s catalog using your points. You typically get less value for your points this way, making it a poor choice.

Some rewards cards offer one of those options, and others offer several.

Cash-back cards vs. rewards cards: Pros and cons

Each type of credit card has its advantages and disadvantages. The key areas where cash-back cards have an edge are:

  • They’re simpler and less time-consuming -- You don’t need to learn anything new to use a cash-back card. They’re easy to understand, and many cards even let you automate your cash-back redemptions to save time.
  • They usually don’t have annual fees -- While this isn’t always the case, most cash-back cards don’t have annual fees, whereas travel rewards cards often do.
  • Cash back has consistent value -- The value of points can depend on how you use them and whether the card issuer does anything that devalues them, such as making award bookings cost more. Cash back won’t have these fluctuations in value, unless the value of the dollar plummets.

Rewards cards also have some important selling points:

  • They have bigger sign-up bonuses -- Although both cash-back and rewards cards can have some attractive sign-up bonuses, rewards cards tend to offer much larger bonus amounts.
  • They often include travel benefits -- Since rewards cards are more travel-oriented, many of them include benefits to improve your traveling experience, such as airport lounge access or free checked bags.
  • Points can have high potential value -- With certain award bookings, you could get $0.03 per point, $0.05 per point, or more. These aren’t commonplace, but they’re out there, and they significantly increase the value you get from your credit card.

When to get a cash-back card

First things first -- if you aren’t traveling at least once or twice a year, then you should look at cash-back cards. Rewards cards are best for travel rewards, and if you don’t travel much, then you’ll struggle to get much value from your points.

Even if you’re a frequent traveler, you may still be better off with a cash-back card if:

  • You want a credit card without an annual fee.
  • You prefer quick, easy redemptions.

When to get a rewards card

One way to look at rewards cards is that you get out what you put in. Here’s what I mean by that:

  • The more you travel, the more you can take advantage of your points and your card’s travel benefits.
  • The more you spend, the more points you’ll earn, making any annual fee your card has less of an issue because of the value you get from those points.
  • The more you learn about travel rewards, the more you can find high-value redemptions that maximize your points.

If you travel multiple times per year, have high spending, or you’re willing to learn how to stretch your points, then you’d probably get more out of a travel rewards card than a cash-back card.

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