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Cashback vs. Points Reward Credit Cards

Posted By Jim On 05/26/2010 @ 12:09 pm In Credit | 23 Comments

When it comes to reward credit cards, there are two major flavors – cash back and points rewards (there’s also miles for travel cards but we put those in the points category). It can be difficult to figure out which one is better, cash back or points, and it depends a lot on your personality and the specific card.

Like everything else, there is no clear winner for everyone because each of our purchasing behavior is different. However, if you spend the time to look carefully, you can find one that works best for you.

Earning Rewards

This morning we looked at how to analyze credit card reward programs [3] and the first step is to look at how you earn cashback or points. Key in the equation is whether the bonus categories, where you earn more than the standard “1%” on your spending, match your key areas of spending.

That “fit” is the first step. There’s no point getting a card that offers 5% cashback on office supplies if you buy very little in office supplies. There’s no point getting one on gasoline if you hardly drive or if the maximum cashback is capped at a really low amount. Once you’ve determined that, you can decide whether you prefer cash back or points.

Pros of Cash Back

There are several reasons I like cash back (why these are always high on my list of best credit cards [4]):

  • Cash is king. Points are great and everything but get a check or statement credit is money directly into your pocket. You can devalue cash as you can with points because a dollar is a dollar.
  • You can buy your own rewards. If you really want something you find in a reward catalog, you can always buy it with the cash back. You can probably get a better deal by going through a vendor like Amazon.com.
  • Reward catalogs are limited. You’re stuck buying whatever the reward catalog has in stock, but you can buy almost anything if you have the cash for it.

Pros of Reward Points

There are pros to reward cards as well:

  • Special bonus offers in the catalog. Discover Card offers double cashback if you convert your points into a gift card from some of their partners. Instead of 2,000 being worth a $20 gift certificate, it’s worth $40. This effectively doubles your cashback if you shop at those vendors.
  • Points let you “treat” yourself. When you get cash back, it’s a little harder to “treat” yourself to something because you’re getting it back in the form of cash. When you get points, you can have a little fun and get a gift card or a product since it “cost” you only points.
  • Many rewards cards have special access to exclusive events. Usually reward cards come with special offers you can’t buy easily, like access to concerts and other sporting events.

My personal preference is for cash back but I can see the value in reward points. A prime example is with my American Express card, where I earn 1% cash back on everything (and 5% on certain special categories). I can convert my points into Southwest Rapid Rewards voucher at a rate that makes each point worth far more than a penny. To find the best option, it comes down to your specifics.

What’s your preference and why?

(Photo: orphanjones [5])


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[3] how to analyze credit card reward programs: http://www.bargaineering.com/articles/credit-cards-reward-programs.html

[4] best credit cards: http://www.bargaineering.com/articles/best-credit-cards

[5] orphanjones: http://www.flickr.com/photos/orphanjones/762062828/sizes/m/

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