The eternal question of credit card bonus seekers deals with points vs cashback. Credit card points and cash back both offer significant advantages, but is cash back or points better? The short answer is that it depends on your individual situation.
Imagine flying business class to stay in an overwater villa in a tropical paradise for free. What’s not to like? If you’re skilled at using credit card points and you value travel, you might be able to pull off this luxury vacation by just using points.
On the other hand, if you don’t want to think about it too much but want to get 1% to 5% cash back on everyday purchases, you could have $100 or more extra in your budget each month thanks to cashback rewards. The option that is better for you will depend on your spending habits, finances and goals.
Keep reading for more insight into whether you should opt for points or cashback.
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Why cashback is not the same as credit card points
What does it mean when people talk about credit card points vs cash back? For starters, cashback is exactly what it sounds like. Credit card companies offer between 1% and 5% cash back on purchases, which you can then request to be directly deposited into your bank account or applied as a statement credit.
Cash back credit cards usually offer at least 1% cash back, with some offering greater rewards in certain spending categories, like groceries, gas, restaurants or travel. On the other hand, credit card points can be redeemed for flights, hotels, concerts, gift cards and more.
These rewards can be of greater value than the 1% cash back or points that you would receive from a cashback card, but that is usually only the case if you select your rewards strategically. For instance, using 10,000 points to book a hotel that only costs $80 per night normally would give you less than the 1% cash back standard.
On the other hand, using 10,000 points to book a hotel that normally costs $250 per night will yield a higher redemption value.
Cashback credit card rewards: pros and cons
Cashback reward cards are usually simple to use, many have low annual fees, and it is usually easy to redeem rewards. Cashback credit cards often have higher rewards in categories like groceries, gas, or restaurants. In the case of store cards, like the Amazon rewards card, you’ll get more cash back or points for purchases made at that store.
Pros of cashback credit cards
- Low or no annual fees on many cashback cards
- Rewards that translate directly to cash
- Simple and easy to use
- Options for higher rewards in the highest spend categories.
Cons of cashback credit cards
- Minimum withdrawal amounts.
- Possible for credit card points to have greater reward values.
Pros and cons of credit card points rewards
Credit card points can offer greater rewards, especially on luxury travel. However, some of the best rewards credit cards come with significant annual fees.
The Chase Sapphire Reserve credit card, for example, has an annual fee of $550. Chase offers travel statement credits for travel up to $300 as well as flexible points that offset this annual fee. However, that is only true if you take advantage of them.
One of the most significant ways to take advantage of rewards credit cards is via sign-up bonuses. With the Chase Sapphire Reserve card, you could receive 60,000 bonus points when you spend $4,000 in the first three months of opening the card as of October 2022.
Just keep in mind that rewards values fluctuate, so it can be worth researching and waiting to sign up for a rewards credit card until you figure out how to earn the maximum additional points.
Pros of credit card points
- Higher sign-up bonuses
- Higher awards points of up to three or more points per $1 spent
- Greater redemption value on flights, hotels and experiences
- Discounts through credit card shopping portals for greater savings
Cons of credit card points
- Annual fees in some cases
- Takes effort to learn how to get the best rewards value
- Often require a higher minimum spend amount to get the sign-up bonus
- Higher credit score to qualify for rewards cards with greatest values
How to choose points vs cashback
So, which type of credit card is right for you? The answer to this question depends on your spending habits and goals. If you dream of booking a luxury vacation, a rewards credit card is probably the better choice.
However, if you’d like to have a little more cash in your budget or save up for a large upcoming purchase, a cashback card might be better. Many credit card point enthusiasts have more than one credit card to maximize rewards in different categories.
Here’s how to choose whether points or cashback credit cards should be your first choice.
Consider which reward type is more important to you
Do you prefer cash over travel perks? That is the top deciding factor. Also, are you willing to invest some time into the process of learning how to get the most out of travel rewards? Or do you just want a statement credit with a single click?
For many consumers, it makes sense to start with a cashback card that doesn’t come with an annual fee. That way, you can start earning rewards and building credit before venturing into all things rewards credit cards.
Remember that you don’t have to start with the reward credit card that everyone else seems to think is best. Start with a card that doesn’t have a high annual fee while offering decent rewards for items you already purchase.
Consider your spending habits
Some credit cards offer generous rewards in one specific purchase category. For example, several travel credit cards offer up to 5% back in points or rewards on travel purchases. Others offer higher rewards on groceries, gas, entertainment, restaurants and various other categories.
Ultimately, you will want a rewards program that offers generous compensation in the category you spend the most money on in everyday life. To figure this out, take a look at your budget to see what you spend the most on from one day to the next.
If you have a small business or you travel regularly for work, a travel rewards card can pay off significantly. On the other hand, if you spend a lot of money on groceries, getting a reward card that offers at least 3% to 5% cash back or points on groceries makes a lot of sense.
Consider how likely you are to use the rewards
The next critical consideration you should make is whether or not you’ll use the rewards. There is a significant percentage of people who use rewards programs and have rewards yet don’t redeem them. So, while it’s fun to dream about overwater bungalows, are you ever going to book your dream vacation?
You’ll also need to make sure that the rewards translate to your travel plans. For instance, if you have 30,000 American Airlines miles but you can only book the flight you need with United Airlines, then the points will remain unused while you pay for a flight out of pocket.
Travel perks might sound better than cash, but if you’re not traveling frequently or within the given hotel and airline networks that your points apply to, then they may not be worth it. In those cases, a cashback card could be a more practical starting point. With that, you can instead apply the cash you earn to any travel plans you make.
Are you willing to pay an annual fee?
Some credit cards require annual fees in exchange for rewards. Annual fees add up, especially if you have more than one rewards credit card. Annual fees usually start at $95 and increase from there for certain premium cards. A single $95 annual fee can be worth it if the rewards you earn are equal to or more than that value.
Is there a sign-up bonus?
Some credit card companies offer sign-up bonuses to new users. These sign-up bonuses are how you can earn the greatest rewards. Sign-up bonuses usually range from $200 to $500 in cash back.
You might even be able to redeem up to $1,000 worth of travel after you meet a minimum spending threshold. Some users will sign up for two or more new cards to get more sign-up bonuses as well.
If you want to optimize your rewards, look for a card with the best sign-up bonus that you can and will use often. This advice is helpful no matter if you choose a cashback card or a rewards card.
Summary of points vs cash back rewards credit cards
With so many rewards credit cards on the market, whatever you decide on between points vs cashback, you’ll want to use a credit card that offers either cashback or rewards that you can redeem for travel and other savings. Otherwise, you will be leaving money on the table.
For beginners, you can start with a cash back rewards card that has no annual fee and offers cashback in your top spend categories. For experienced credit users with good credit history, it could be worthwhile to venture into the world of rewards credit cards that offer points you can use with any airline.
However, if you choose to use rewards credit cards, remember the basics of responsible credit card use. For starters, pay the cards on time, and make sure you pay the balance in full each month as well.
Also, don’t apply for more than one to two credit cards at a time. Last but not least, don’t overspend just for the sake of reaching awards thresholds.
But is cash back or points better? On the one hand, cashback is simple as it adds a little extra bit of cash back into your life. On the other hand, points offer potentially greater value, but they may not be practical for many users. So, choose the option that is best for you and go from there.
Can I convert credit card points to cash?
Yes, some credit card providers let you convert credit card points to cash. Check with your bank or the credit card issuer to see if your credit card points can be converted to cash. Keep in mind that if you convert your points to cash back instead, you’ll usually receive a lower cash value than the value of the rewards.
Is cash back taxable?
Cashback earned from credit cards is not taxable. The IRS treats cash rewards as a spending rebate and not as income. When debating credit card points vs cash back, either is not tax deductible.
What does 1.5% cash back on every purchase mean?
If you see something that says you could receive 1.5% cash back on every purchase, this means that, for every $100 you spend with the credit card, you will earn $1.50 in cash. Usually, this still requires you to reach a minimum reward amount, say $50, before you can redeem the rewards.