Cash Back vs. Rewards: Credit Card Showdown
Is there more value in credit cards that offer cash back, or rewards? Let's settle it once and for all.
Cash back or rewards?
If you're in the market for a new credit card, you might be wondering if one of these is right for you.
After all, if you're going to use a credit card, you may as well get something out of it.
Wouldn't you like to earn some cash back or airline miles when you swipe your card?
Cash back credit cards and travel rewards credit cards typically have a few things in common, so let's get those out of the way first.
The annual percentage rate, or APR, can typically range from around 9.74% to 25.99% for either type of card, and some cards carry a variable-rate APR.
Some cards offer a lower introductory APR for the first year or a chunk of free bonus points once you hit a certain spending level.
Unless you're applying for a credit card with a financial institution, you typically don't need to have another checking or savings account with the provider.
If you're applying for a card with your bank or credit union, you might need to have a checking or savings account first to qualify for the card.
But your bank might also offer certain perks for having several accounts with them.
Many credit card issuers will offer low introductory APRs and more perks during the first year that you have a new card, but incentives for long term customers are less common.
If you're shopping around for a new credit card, check first with your bank or credit union to see if they're running any good promotions.
It's important to read customer reviews before you select a card, but take these with a grain of salt, too.
Even the best-regarded credit cards have more than a handful of unhappy customers complaining online.
People are often quicker to complain online when something goes wrong than they are to write about a perfectly pleasant interaction.
Security measures for both types of cards will likely be similar, too. Most cards today have a security measure called the chip-and-PIN.
If you've recently received a new card with a little chip on it, you'll know what this looks like.
Like the magnetic stripe on the back of the card, the chip contains all your card information, but unlike the stripe, it keeps your information safe with something called tokenization.
When you dip the chip in a card reader, it issues a number, or token, unique to that sale.
If cyber thieves hack into a retailer's database, they won't be able to use your card info to make phony duplicates.
Instead, they'll come up with tokens upon tokens, none of which they can use to recreate your card.
Chip-and-PIN only works if a retailer's point-of-sale system can read the chip.
If you swipe your card, you're still exposed to the same risks. Ditto to online shopping.
Card issuers are getting more creative in this area, though. One new option is the ability to freeze and unfreeze your card with an app on your phone.
This way, you don't have to panic and call the card issuer for a new one if you think you've only misplaced your card.
Cash Back Credit Card
A cash back credit card is simple.
As you use your card and pay down your balance, you earn back a certain percentage of your spending for a cash deposit or statement credit.
Most cash back credit cards take one or two billing cycles to kick in, and they may require you earn a minimum number of rewards before you can redeem them.
Cash back credit cards usually operate on a point-based system – commonly 1% of purchases with certain categories, like gas stations and grocery stores, weighted more heavily.
Some cards will rotate the better-rewarded categories, but others do not.
The percentage you earn back can range from 1% to 6%, depending on the card.
Sometimes the card issuer will also offer different values for different types of redemption – for instance, $50 for a statement credit or $40 for a direct deposit.
The Citi Double Cash card is one good option for those who pay down their balance monthly and don't need the travel points.
This card offers 1% cash-back on all purchases and another 1% back when you pay off your balance in full.
This is a good, basic cash rewards card for people who don't want to keep track of rotating categories or pay any annual fees.
Frequent travelers and ardent foodies might get a better deal out of a card that rewards travel and dining purchases.
Capital One offers several rewards cards and its Premiere Dining Rewards card is a great deal for people who often dine out because it offers 3% back on restaurant spending.
Cash back credit cards are far more flexible than travel rewards cards and are generally a better choice for most consumers.
Even avid travelers may struggle to spend enough to get much value out of a travel rewards card when compared with what they would earn from a cash back card.
Plus, you can use that cash back for whatever you want: pay down your balance, do some grocery shopping or store it away for a vacation.
If you don't travel often, you'll likely get more bang for your buck with a cash back credit card.
Travel Rewards Card
As you spend with a travel rewards card, you earn points toward a travel expense, often airline miles or hotel stays.
Travel rewards cards tend to be a little more complicated than cash back credit cards.
They're a great deal for a certain type of consumer, though.
Some rewards cards tally up points when you use them for any kind of purchase, while other cards award points only when you spend on travel.
Often, travel rewards cards have rules as to how you can redeem your rewards, as opposed to no-strings-attached cash.
This type of credit card often offers an enticing sign-up bonus or higher rewards during the first year or two you have the card.
Meaning, the longer you have the card, the more you must spend to earn rewards.
Don't let that put you off, though.
Travel rewards cards can be a great option for frequent travelers.
They're a great option for international travelers because they often reward international spending more and seldom charge foreign transaction fees.
Airline or hotel co-branded cards also often offer bonus perks, like free checked bags.
The Chase Ultimate Rewards series of cards is popular right now.
Chase offers several different kinds of cards under this brand, including both cash rewards and travel rewards.
Their big selling point is that your points won't ever expire, if your account is open.
Chase also boasts that it's easy to redeem rewards.
Read the fine print before you go with a travel reward credit card.
Do you earn travel points on all purchases or only travel-related purchases?
How long will it take you to accumulate enough rewards to be worth it to you?
What is the likelihood you'll be able to use those rewards?
If you travel frequently, and especially if you travel overseas, a travel rewards card might be the better option for you.
Travel rewards cards can also be a good option for people who don't mind switching to another card after a few years when the rewards become a little less rewarding.
Most credit card lenders, or most lenders generally, look at your FICO score when they decide your application.
The FICO score ranges from 300 to 850, and the higher the better.
Generally, a score above 640 is considered prime or even super-prime, while a score below 640 would be poor or subprime.
While every card is different, some very prestigious credit cards look for a very high FICO score.
If your FICO score is below 640, you might want to take a few steps to improve it before you apply for a new credit card.
Improving your credit score is simple but also requires patience and discipline.
To build up your score, you need to make regular payments on time, but how can you make payments on a credit card if nobody will give you one in the first place?
It's a catch-22, but fortunately, there are a few tricks you can use to boost your score.
If you currently have any accounts in poor standing, settle those up first.
Check your credit report to make sure you haven't missed any – or worse, had your identity used to open fraudulent accounts.
By law, you are entitled to one free credit report from each of the three major credit bureaus every year.
You can request a report from Experian, TransUnion or Equifax (or all three) at annualcreditreport.com.
If you still need a boost after getting your accounts in order, or if you don't have any credit history in the first place, you might consider a secured credit card.
A secured credit card requires the borrower to put up a cash deposit beforehand, usually between $300 to $1,000.
This deposit functions as the borrower's credit limit and as a guarantee that the card lender won't lose anything if you default.
But as you use your card and pay down your balance every month, you show potential creditors that you can handle a monthly bill.
Secured credit cards are increasingly popular right now, and many banks and credit unions offer them.
By using a secured credit cards and diligently paying down your balance monthly, you should be able to boost your credit score within six months to a year.
Credit Card Fees
So far, we've covered the types of rewards you can earn with a cash back or travel rewards credit card, but it's also important you be aware of any fees before you apply for either kind of credit card.
Many cash back credit cards are free of annual fees, but some, like the American Express Blue Cash Preferred Card, do charge annual fees as high as $95.
That card offers hefty rewards for spending at grocery stores and gas stations, so if you're often buying groceries for a large family, the fee might be worth it.
This card has mixed reviews online, with many consumers complaining about problems with billing and customer service, but has been generally well-reviewed for its bonuses and rewards.
If you're concerned about fees, you may want to check out a credit union.
Pentagon Federal Credit Union offers a co-branded cash rewards Visa card.
The PenFed Power Cash Rewards Visa Card charges no annual, foreign transaction or cash advance fees.
Its APR is also on the lower end, between 9.74% and 17.99%.
Pentagon FCU also offers several other travel and cash rewards cards with similarly low fees and APR, like its American Express travel rewards card.
Travel rewards credit cards charge annual fees more often than cash back credit cards.
The better the rewards, the more likely the annual fee.
On the low end, annual fees on travel rewards cards can be around $39, while most will run closer to $89 or $95.
Premium travel rewards cards charge even higher annual fees, sometimes as much as $450.
For some consumers, the rewards outweigh the hefty annual fees, and some of these premium travel rewards cards have become popular with Millennials.
Credit cards of either type often offer sign-up bonuses to customers, like a low introductory APR or no annual fees for the first year.
While most credit cards won't exactly go out of their way to advertise fees or high APRs, they can't conceal that information from you, either, which is why it's important to read the fine print.
Many travel rewards cards are free of foreign transaction fees, and that's part of their appeal to frequent travelers.
Cash back credit cards and other types of credit cards usually charge a foreign transaction fee, and 3% of purchases is typical.
Most credit cards charge balance transfer fees or cash advance fees.
When you pay off one card using another, this is when you'll incur a balance transfer fee.
Balance transfer fees often run around $10 or 3% of the total balance you're transferring, whichever is higher.
Sometimes credit card lenders will waive balance transfer fees for the first year to entice new customers.
If you want to take out a cash advance from either kind of card, that's also going to cost you.
This is a cash advance fee, and they range from 3% to 5% of the total amount you're borrowing against your credit limit.
If the cash advance fee is 5% and you're taking out $300, for example, that would cost you $15 – on top of any ATM fees you might also pay.
Travel Rewards or Cash Back? Our Conclusion
For most consumers, a good cash back rewards card will make the most sense.
The average American doesn't usually spend quite enough on travel to get significant value out of a rewards card, and these card issuers tend to place restrictions on how and when you can redeem those rewards you've accrued.
But you can use cash whenever and however you want.
Cash rewards cards also tend to be more consistent in terms of how they award points.
A travel rewards card might offer some enticing sign-up bonus points, but typically speaking, those rewards will start to taper off after you've had the card for a few years.
For certain consumers, a travel rewards card will make the most sense, though.
If you often travel internationally, you might like a card that's free of foreign transaction fees.