If you’re in the market for a new credit card, one of the first questions you’ll likely face is whether you should go for a cashback card or a points-based rewards card. Both options come with their own set of perks, but the decision largely depends on your spending habits and what kind of rewards you prefer. In this article, we’ll break down both options, explore their differences, and help you figure out which one works best for your financial goals.
What is Cashback?
Let’s start with cashback cards. As the name suggests, these cards offer you a percentage of your purchases back in the form of cash. You can usually redeem cashback in the form of statement credits, direct deposits to your bank account, or even gift cards in some cases. The key benefit of cashback is its simplicity. No need to figure out points conversions or complex redemption systems; what you see is what you get.
For example, if you spend $100 on groceries with a 2% cashback card, you’ll earn $2 in cashback. It’s straightforward, and you can put that cash to immediate use, whether it’s paying down debt, buying more groceries, or even saving for a rainy day.
What are Points?
On the other hand, points-based cards operate a bit differently. Rather than giving you cash back, these cards award you points for every dollar you spend. The points can then be redeemed for travel, gift cards, merchandise, or sometimes even cashback. However, unlike cashback cards, points come with more flexibility, but they also require a bit more strategy to maximize their value.
For example, a credit card may offer 3 points per dollar spent on dining, and 1 point per dollar spent on everything else. While it sounds great, the actual value of these points depends on how you redeem them. Some travel cards, for instance, may offer you the ability to redeem your points for flights or hotel stays, often at a much higher value than if you used the points for merchandise or gift cards.
Comparing Earning Potential
Now that we have a basic understanding of cashback and points, let’s compare their earning potential. A cashback card typically offers anywhere between 1% and 5% cash back on your purchases. The rates can vary, with categories like groceries, gas, and dining often earning a higher percentage.
For example, the Chase Freedom Unlimited card offers 1.5% cashback on all purchases, while the Blue Cash Preferred Card from American Express offers 6% cashback on groceries (up to a certain limit), and 3% cashback on transit and gas.
On the other hand, points cards often come with higher earning rates in specific categories. The Chase Sapphire Preferred card offers 2 points per dollar on travel and dining, and 1 point per dollar on all other purchases. This makes it a solid option for those who frequently spend in these categories. Some points cards, such as the American Express Gold Card, offer even higher rewards rates for dining and supermarkets.
However, points often come with higher annual fees and more complex reward systems. So while you may earn more points, it’s essential to make sure those points translate into valuable rewards.
Redemption Flexibility: Cash vs Travel
One of the main differences between cashback and points is how you redeem the rewards. Cashback is generally more straightforward—you can redeem your rewards for actual money. If you’re looking for simplicity and immediate access to your rewards, cashback is the way to go.
Points, however, offer more flexibility. While they may not translate into cold, hard cash, they can be used for a wide variety of rewards, from travel to merchandise. For example, if you’re a frequent traveler, you might prefer points-based rewards because you can use them to book flights, hotels, or even car rentals through the credit card’s travel portal. In some cases, you can even transfer your points to airline or hotel partners for potentially greater value.
If you’re someone who loves to travel, you might get much more value out of your points than the equivalent cashback. Many travel rewards programs allow you to redeem points for flights or hotel stays at a rate that’s often better than what you would get with cashback cards. But, there’s a catch: you need to be savvy with how you redeem those points, and sometimes the travel redemption process can be a little tricky to navigate.
Which One Fits Your Spending Habits?
When choosing between cashback and points, you’ll want to think about your spending habits. Are you someone who prefers simplicity and wants to see a tangible benefit for every dollar spent? If so, a cashback card might be your best bet. You can use your rewards for anything—from groceries to utilities—and you don’t have to worry about figuring out how to redeem your rewards.
On the other hand, if you’re a frequent traveler or a big spender in certain categories (like dining, entertainment, or groceries), a points-based card might offer more value. With points, you can earn higher rewards in specific categories, and with the right card, you can transfer those points to travel partners for even greater rewards.
The Pros and Cons of Cashback Cards
Let’s take a closer look at the pros and cons of cashback cards:
Pros:
- Simple and straightforward: You get cash, no questions asked.
- Can be redeemed for any expense, not just travel.
- Lower annual fees compared to many points cards.
Cons:
- Typically lower rewards rates compared to points cards.
- Less flexibility if you prefer travel-related rewards.
The Pros and Cons of Points Cards
And now, the pros and cons of points cards:
Pros:
- Higher rewards in specific categories like dining or travel.
- More flexibility with redemption, especially for travel enthusiasts.
- Potential for transferring points to airline or hotel partners for even greater value.
Cons:
- Requires more planning and knowledge to maximize rewards.
- Higher annual fees compared to cashback cards.
- Some points expire or have restrictions on how they can be used.
Making the Right Choice
Ultimately, the decision comes down to how you plan to use your credit card rewards. If you want a no-hassle experience and prefer cash that you can use on anything, cashback cards are probably the better option. On the other hand, if you’re looking to earn points for travel or want the flexibility to choose how you redeem your rewards, a points card might be the right choice.
Here are a few things to keep in mind as you make your decision:
- Your spending habits: If you spend more in certain categories (e.g., dining, groceries, travel), a points card may reward you more. But if you spend across a variety of categories, a cashback card might give you the simplicity and flexibility you need.
- Annual fees: While points cards often come with higher fees, they may also provide better value if you can redeem rewards effectively. Make sure to factor in the cost of the annual fee when calculating how much value you’ll get from the card.
- Your lifestyle: If you love to travel, a points card can provide great value for booking flights and hotels. But if travel isn’t a priority for you, cashback is more practical and offers immediate rewards.
In the end, whether you go for cashback or points depends on your preferences, goals, and how much time you’re willing to spend optimizing your rewards. Either way, the key is to choose the card that aligns best with your spending habits and lifestyle to get the most value from your rewards.