Credit cards that offer rewards in the form of cash back or air miles are by the most popular credit cards on the market. Choices, choices, that is what you will be faced when deciding on the best rewards card. There are literally hundreds of cards to choose from with each having a system a little bit different than the other.
If you use these cards the proper way you will see tremendous value and savings that make owning a credit card a benefit rather than a financial burden. Performing a little bit of research and tailoring the cards to your personal spending habits are effective ways in getting the most out of your card.
Why credit card companies have rewards
You may be wondering why credit card companies offer such valuable reward programs and how they make money. Truthfully they do not make any profits if you are consistently racking up points. To make up for this they make their profits with annual fees, interest paid, and fees such as foreign transaction and cash advance fees. Not everyone takes full advantage or even use their points at all. These reward programs motivate the consumer to use the card often and therefore chances are interest and fees will accrue the more it is used.
Not everyone takes full advantage or even use their points at all. These reward programs motivate the consumer to use the card often and therefore chances are interest and fees will accrue the more it is used.
Cash Back Cards
Cash back cards award you a percentage of cash back every time you make a purchase with your card. Cash back cards generally have an annual fee however you can find several with no annual fee.What is more important is the value of the cash back reward program.
If you really want to get full value then an average of 2% cash back rate is ideal. Think of this 2% as the benchmark. Many times a card will offer 1% cash back on all purchases with a revolving category that can pay up to 5% on all purchases.
This can average to a little bit over 2%. It is important to read all the cash back features and restrictions. At times there can be a limit to how much cash back you can earn, and you will definitely want to stay away from these cards, as many offer unlimited cash back.
In some cases, you can find specialty cards that will pay out more cash back if you spend money in a certain category, such as travel. For example, IF you do a lot of travel the Pen Fed Premium Travel Rewards American Express Card which offers 4.5% cash back on money spent specifically on travel.
Let’s compare two different cash back credit cards. The Citi Double Cash Card offers an unlimited 1% cash back on any purchase and you get another 1% when you pay for those purchases whether in full or over time, it doesn’t matter.
Next we have the Bank Americard cash rewards credit card. It offers 1% cash back on every purchase, 2% at grocery stores, and 3 % cash back on gas.
You might think, ‘great this is over the 2% rate we talked about earlier in this article’, % .however, there is a catch. It is limited to $1500 dollars in spending on the 2% gas and 3% grocery purchases.
This means there is a limit on how much you can earn and overall it probably won’t equal the benchmark o%. Therefore, the Citi Double Cash card would be the best option. This is the kind of analysis that is needed to decipher between which card offers the most value.
Choose a card with a simple Redemption policy
Another thing to look out for is the simplicity of the redemption system. Some cards make you jump through hoops to get your cash back rewarded. Furthermore, some cards have restrictions on what you can use your cash back rewards for. For example, some cards only allow you to earn cash back on their rewards website. Choose a card that allows you to do more than that, such as: redeem your points on the rewards website, use the points on your card balance, or have the company issue you a check.
Furthermore, if you are looking at a card with revolving categories that reward you with an increased cashback percentage you will have to opt in to receive it. Many people do not realize this and often miss out on the revolving category.
The Bottom Line
Choose the cash back card that has the best average cash back value which should equate to an average of 2% overall. Only choose a card with an annual fee if you know your benefits will outweigh the annual fee by a wide margin.
CreditRating.com did a study comparing 5 star rated cash back cards vs 5 star rated points cards, and their conclusion was that overall, cash back was the winner. So if you don’t want to jump through any hoops or you won’t be specifically spending in a category that offers big point bonuses or miles bonuses, then cash back is better overall.
Read our guide to the Best Cash Back Credit Cards
Air Miles Cards
Air Miles Cards reward you with air miles whenever you make a purchase with that credit card.These cards sometimes have an annual fee with an average interest rate. The average is usually 1 reward mile for every dollar spent on the card.
It can be a lot harder researching and learning which card has value over another card compared to cash back cards. This is because the number of miles included depends on how many reward seats are made available by that airline.
If you will use your air miles, you will find that air miles card provide more value then any cash back card. This is especially the case with the bonus introductory offers that accompany these cards. Many of these offers include free bonus miles that include enough miles to travel to very distant location for free.
For example, the Capital One Rewards Venture Credit Card includes a one-time bonus of 40 000 air miles after you spend $3000 dollars. Sure you have to spend $3000 but the value of those miles is equivalent to or more than the $3000.That is a lot of miles when you consider a flight from New York to California is only approximately 2500 miles.
You can travel all around the world based on the introductory bonus air miles alone.
How to calculate the value of miles cards
The cost per mile can be calculated by dividing the cost of a flight ticket by the number of points you earn on your card for the trip. For example, if you fly 7000 miles and spend $500 on your ticket that would bring the cost per mile to 7 cents (500/7000) The further you fly higher the cost per mile will be.
Furthermore, look for the card that offers the most reward miles per dollar spent. For example, the Capital One Venture Rewards credit card offers 2X miles per dollar spent while the Bank Americard travel reward credit card offers 1.5 points per dollar spent. The Capital One card has a $59 dollar annual fee while the Bank Americard has no annual fee.
However, the benefits of earning 2x the points outweigh the fact there is the annual fee. Therefore it would be wise to go with the 2X miles per dollar spent.
Look for Best Redemption System
Different cards each have their own way of allowing you to redeem your miles.The complete details can be found on the card’s website or in the card’s contract. Be sure to ask many questions regarding the redemption system so there are no unwanted surprises when redeeming the miles. The following exhibits the features to look for in a redemption program:
- look for a card that does not charge a booking fee: some companies will charge you a fee for booking the flights. Look for companies that do not charge this fee.
- find a rewards system that doesn’t have limited travel dates: Many times you will see companies that don’t allow you to travel during the holidays or march break. If you plan on traveling during this time go with a card that doesn’t have limited dates.
- find a system that doesn’t have a limit on redeeming the miles: some card companies will only allow you to redeem your miles once every quarter etc. If you will want to travel a lot then go with a card that allows you to redeem your miles as many times as you want.
Tips on redeeming air miles
- book in advance: when you have redeemed your points and are looking to book your flight make sure you do so well in advance. By well in advance, we mean over 1 year ahead of time. It can be tough to book a trip this far in advance but if you want to ensure there is availability then it must be done. This is especially true if you are traveling during peak travel dates such as the holidays, or march break etc.
- Be flexible: Sometimes you can only use your miles during specified travel times. This is consistently the case when you do not book your trip well in advance. For example, if you book your trip over one year ahead of time there should no restricted travel dates, however, if you attempt to book your trip one month in advance chances are everything will be full and you can’t travel during that time
- Use Airline Alliances: An airline alliance is an agreement between two or more airlines who agree to coordinate on a similar level. This means there can be more travel dates, more departure times, and more destinations to choose from. Two of the most popular alliances are: Starworld and Oneworld.If the dates you want to book are already filled then use one of these airline alliance to help find available seats for that time.
The Bottom Line
If you fly frequently for business or leisure then an air miles card is the definitely the card to get — if you are a savvy traveler and look for bonuses on your miles and you get a card with a BIG signup mile bonus, you definitely get better than the standard 2 percent cash back cards if you redeem your miles to fly. You will get more value out of a miles card then a cash back card.
Choose the card that offers the most introductory miles, as well as the card the offers the most miles per dollar spent. Summary: IF you look for deals, you plan on travelling and will be using the card to book flights and are smart about how you plan out your miles redemption (i.e. you take advantage of special mile offers, both in ticket redemption AND for bonuses when you book with your card), miles credit cards can offer you the best return.
However, you have to plan out how to use it. For the average person who won’t be doing all this extra work, then cash back is better on average.
Read our list of the best air miles credit cards
Points Credit Cards
Both cash back and air miles cards can include a points reward program. Points are earned when a purchase is made with the card and can be redeemed for products, gift certificates, and rebates on travel and flight. These cards sometimes come with annual fees however many of them have no annual fee.
How to get the most value with points cards
To get the most value out of your points, it is ideal to redeem them for any sort of air miles rather then products, gift certificates etc. Doing this can essentially give you double the air miles. For
For example if you have 2500 points you can redeem them for 2500 air miles. Now 2500 air miles has a lot more value then using your points for say a gift certificate. For example with the Bank Americard Travel Rewards Credit
For example with the Bank Americard Travel Rewards Credit Card you earn 1.5 points for every $1 spent on purchases, these points can then be redeemed for miles.
The Bottom line
Points cards can offer a lot of value when many points are accumulated IF you plan out how to get the best deal. Keep in mind though that redeeming points compared to cash back will often give you equivalent of about 1% OR less cash back.
So on average, Cash Back 2% cards would be better. To fully take advantage of the points for better value, redeem them for travel, specifically on air miles to get the most value. In this case, point cards can be treated like Air Miles cards.
We generally recommend Air Miles cards as a better option, specifically, than point cards, because of the signup bonus and, if you fly often and look for air miles deals, you can get better value than just using points to trade in for merchandise.
Read our guide to the best points credit cards
Cash Back vs Point Cards vs Miles Cards: The Winner?
It can be hard to decided which one is the best, however, we do a bit of the work for you.
So Which is Better?
On the surface, ‘cash back cards’ are better. Who wouldn’t want 2% cash back. And on average (creditrating.com did a study on this), cash back works out better for most people. However, if you are willing do the extra work to find deals, Air Miles and Reward Point Cards may give a better return than cash back cards. But, again, you’ve got to use them right and for the right types of purchases. For point cards, trading in your points for merchandise typically gives the worst return of all (less than 1 percent cash back).
Below is a quick summarization of which card can be best for you:
Cash Back Cards
- frequent card users
- individuals who don’t travel often
- individuals with good credit
How to choose the best card
- look for cards that award cash back on every purchase
- look for cards that allow you to earn unlimited cash back
- look for cards that have an average cash back rate of 2%
- only choose a card with an annual fee if the cash back you earn is a good amount higher then the annual fee.
- choose a card with the easiest redemption of cash back
Air Miles Cards
- consumers who frequently stay at hotels
- consumers who are frequent fliers
- individuals with an excellent credit score
How to find the best card
- look for most highest amount of introductory free air miles
- highest air miles accumulated per dollar spent
- only choose a card with an annual fee if the miles awarded will exceed the annual cost
- choose a card with an easy redemption of air miles
- choose a card where the miles don’t expire