Which type of credit card makes sense for you: cash back or travel rewards? Zeroing in on your spending and lifestyle needs can help you make the right choice.
If you prefer to fly domestically in economy class, travel rewards credit cards might not offer much of a benefit. However, if you fly internationally and enjoy access to first class and other perks – such as free baggage privileges or upgraded hotel rooms – a travel rewards credit card can make sense.
Cash-back rewards credit cards are a better fit for many other types of cardholders, extending flexible redemption options and, often, lower fees. But the rewards with cash-back credit cards might be lower, too.
How Rewards Cards Work
Rewards credit cards provide perks that make spending your hard-earned cash a little more pleasant. Each time you use one of these cards, you get something in return, ranging from cash back to points or airline miles that can be redeemed for travel, merchandise and other offerings.
Cardholders love their rewards. In a U.S. News survey, nearly 23 percent of respondents said their credit card’s rate of earning rewards or ability to earn a sign-up bonus primarily influenced their decision to choose a specific card.
Cash back is the most popular redemption option for credit cards, with 42.7 percent of respondents redeeming cash back within the past 12 months. But airline rewards, gift cards and hotel rewards are also popular redemption choices.
Understanding your spending needs and habits – and the types of perks that rewards credit cards offer – is the key to finding the right card and squeezing the most rewards from it, says Gary Leff, co-founder of the InsideFlyer.com frequent flyer community and author of the frequent flyer blog View from the Wing.
“Once you know the value you’re getting from the card, the comparisons aren’t hard to do,” he says.
Choosing the Right Type of Rewards Credit Card
Making the right choice between a cash-back or travel rewards card depends on what your rewards goals are, Leff says.
“What are you looking to get?” he asks. “You’re never going to make a good choice in a rewards card if you don’t know what you’re trying to get for the rewards.”
It also pays to do a little planning before you choose a card, says Christine Krzyszton, points content contributor for the travel rewards website UpgradedPoints.com.
For example, some cards dole out a sign-up bonus, but only if you spend a specific amount of money within a given time frame.
Applying for such a card makes sense before a major purchase or before a big payment is due. “This makes it easier to meet the initial requirement and assures you’ll receive the rewards bonus,” Krzyszton says.
The Advantages of Cash-Back Rewards
Both cash-back and travel rewards cards offer perks to cardholders. However, Leff says he believes that a cash-back rewards card is the best choice for many consumers, particularly those who rarely travel internationally.
“If your goal with a rewards card is just (to buy) domestic coach tickets – Say, you want to fly to Florida – you’re not going to get nearly as much value out of airline frequent flyer miles,” he says.
Going with a cash-back card gives you more options for using the rewards. For example, you can use the cash to book the cheapest flight you find, with no restriction on choice of airlines or booking dates.
“You’re probably better off taking cash and buying the travel you want, rather than worrying about what is available as an award and having to give up flexibility,” Leff says.
Dan Miller, founder of the family travel blog Points With a Crew, agrees that cash-back cards often make sense for people who have simple needs when they fly.
“I’ve found that if you’re just flying economy, it’s almost always cheaper to use either cash or points that can work as cash instead of using traditional miles on an airline’s award chart,” he says.
Krzyszton says another perk of cash-back cards is that they often are available with no annual fee. They also tend to have a simple earning structure that makes them attractive.
“A consumer who is not interested in paying an annual fee and doesn’t want to keep track of complicated earning schemes would be best suited for a cash-back card,” she says.
The Advantages of Travel Rewards
However, travel cards can be a better option for some cardholders – particularly jet-setters who love to travel abroad, Leff says. In that case, a travel rewards card becomes more valuable, especially if you want to upgrade to first class to make a longer trip more comfortable.
“If your goal in rewards is premium cabin travel around the world, airline miles are going to be more valuable,” he says.
Krzyszton agrees that travel rewards cards provide perks for frequent travelers. “They can offer benefits that make your travel more comfortable,” she says.
For example, you might receive free and upgraded hotel rooms as well as elite status with a hotel-branded credit card. Meanwhile, an airline-branded credit card might allow priority boarding and free checked bags, Krzyszton says.
If you don’t want to get tied down to a specific airline or hotel chain, general travel rewards cards may have benefits such as free airport lounge access, annual travel credits and credits for TSA Precheck or Global Entry. Some travel cards also offer the ability to transfer points to airline and hotel loyalty programs.
Finding the Best Credit Cards
Regardless of which type of card you choose, the key to finding the right rewards card is to compare “the best in each space,” Leff says. He suggests some simple criteria for choosing a cash-back card with a solid reward: Don’t settle for a credit card with less than 2 percent cash back.
Miller agrees that a cash-back rewards card should supply a minimum of 2 percent back. “For most people, earning 2 percent cash back is going to beat earning miles and points,” he says.
Many credit cards offer up to 5 percent cash back in categories that rotate throughout the year. For example, the reward may apply to gas purchases for three months, then restaurant purchases for the next three months.
Other cards produce cash-back rewards in categories that remain stable throughout the year; the Bank of America Cash Rewards credit card offers 3 percent cash back in a category of your choice (six categories), plus 2 percent cash back at grocery stores and wholesale clubs (up to a combined $2,500 in quarterly purchases), and 1 percent cash back on other purchases.
For travel rewards cards, Leff recommends seeking one that offers at least 2 miles per dollar in rewards.
“Rewards cards are going to win when your goal is international premium cabin travel and when you’re earning more than 1 mile per dollar,” he says.
Leff also urges card shoppers to look for cards that participate in travel rewards programs that allow you to use miles with multiple airlines. He cites examples such as Chase Ultimate Rewards, American Express Membership Rewards and Citi ThankYou Rewards.
“You can move those (miles) to different airlines,” Leff says. “Given the flexibility, you’re much more likely to get the rewards you want, when you want (them), since you have more choice.”
Miller says to get the best deal on a travel rewards card, look for a generous welcome offer – such as a card that awards thousands of bonus miles after you make a specific dollar amount of purchases within an introductory period.
“That’s where travel cards shine,” he says. “Most cash-back cards either do not offer any bonuses or offer smaller bonuses than travel cards.”
Krzyszton says many travel rewards cards come with high fees. “A premium travel rewards card can have an annual fee of $450 to $550,” she says. For some consumers, finding a card with a lower fee makes more sense.
However, she adds, paying more for a card with travel benefits that are especially good and useful can be worth it.
“If you can use the travel benefits that come with these cards, you’ll find value far beyond the cost of the annual fee,” Krzyszton says