Editorial Policy

The great card debate: Cash back or rewards?

Dawn Papandrea

May 12, 2016

If you’ve been watching the political debates during the runup to the election, you may enjoy this credit card showdown: Cash back vs. rewards cards.

Not unlike candidates vying for your vote with new policies, credit issuers are constantly introducing new cards to appeal to different types of consumers. This can create confusion if you’re not sure which cards should get your vote.

To help you decide whether cash back or rewards cards best align with your financial goals, we decided to let the cards face off at CreditCardGuide.com’s “plastic podium.”

Cash back: Fighting for simplicity

Key demographic: Modest spenders, busy people and consumers who seek more transparency in their cards.

The pitch: Easy rewards
The rise of cash back cards has been very much driven by consumer insights, says Troy Dennis, head of credit card product management and acquisition at TD Bank. “Consumers and regulators are mandating that programs become simple and transparent,” he says. That’s why over the past few years, you’ve seen marketing that focuses on points that never expire, no limits on how much you can earn and other straightforward card benefits.

“Cash back offerings today really speak to someone who wants simplicity, or the idea of ‘easy to earn and easy to burn.’ In other words, redemption is really easy. You either get a check in the mail, get a statement credit, or you can go online and credit a purchase you already made,” says Dennis.

“Cash back offerings today really speak to someone who wants simplicity, or the idea of ‘easy to earn and easy to burn.’”
— Troy Dennis, TD Bank

Consumers who favor cash back cards are those who are not really interested in engaging with a product, but still want value for their spending. Cards that offer a set amount of cash back for all purchases offer a no-brainer option, such as the Capital One QuickSilver, which offers 1.5 percent back on every dollar spent.

Rewards cards: Working for you

Key demographic: Big plastic spenders, frequent travelers, number crunchers and consumers with good or excellent credit scores.

The pitch: Invest some effort, get bigger rewards.
The people who probably get the most out of rewards credit cards are those who put in the most work, says Dennis.

“When you get into fee-based rewards programs, typically consumers who look for that have a more mature, deep credit file,” he says. “They’ve done the math, and understand what they’re looking for.”

By math, Dennis refers to figuring out how to earn back the card’s annual fee, and then some. For instance, a rewards card may have a $95 annual fee, but 25,000 earned points could be worth $325 in value, he says. Add in other perks such as waived foreign transaction fees, credit for airline baggage and possibly access to airport lounge areas, and the fee becomes almost inconsequential.

While you don’t necessarily have to be a road warrior to make a travel rewards card work for you, you do have to spend a significant amount, says Dennis. “If you spent north of $20,000 per year on your card and travel once or twice a year, typically you can find a rewards program with an annual fee that’s worth it.”

In most cases, though, reaping substantial rewards means you’re someone who books more than an annual trip.

“Airline and hotel points are narrowing their appeal to hobbyists, frequent travelers and people who understand these systems,” says Jason Steele, a frequent contributor to travel awards website ThePointsGuy.com.

“You can get tremendous value, but without engagement, you might end up with tremendous frustration,” he says. In other words, you may earn points, but can’t redeem them for the specific airline or travel dates you desire.

And if you’re still undecided?

What happens if you don’t mind putting in some work to maximize rewards, but you’re not a big traveler? Or, what if you like to travel, but have to limit your dates and destinations because of your family situation or work schedule?

“If you’re a parent and hitting grocery stores every couple of days, and you buy gifts there and fill prescriptions, these bonus cash back cards are great for you.”
— Jason Steele,
frequent contributor
to ThePointsGuy

You don’t have to choose sides. There are credit cards that combine the best qualities of both cash back and rewards cards — sort of like an independent candidate.

For instance, some cash back programs can get complex, but offer a higher return. There are cards that have bonus rewards in specific spending categories, such as groceries or gas. “If you’re a parent and hitting grocery stores every couple of days, and you buy gifts there and fill prescriptions, these bonus cash back cards are great for you,” says Steele.

There also are cash back programs that have rotating category bonuses, such as the Chase Freedom and Discover it cards that offer up to 5 percent cash back on certain purchases at certain times. Those require you to log into your account once per quarter to activate your bonus categories and then spend a certain amount.

To maximize rewards with these more involved cash back cards, Steele recommends putting a sticker on the front of your card to remind yourself which categories are part of the current promotion. So in April, May and June, it might be home improvement and restaurants, but the next quarter it might be department stores and gas.

Want rewards without extra work on your part? Some issuers offer rewards cards for infrequent travelers who just want to save a few bucks on flights and hotels. These cards often have no annual fee for at least the first year and no blackout dates, and the programs offer the ability to book with any airline. The Capital One Venture Rewards and Discover it Miles cards are just two examples. (Discover it Miles has no annual fee.)

If you’re not someone who enjoys the “game” of tracking rewards, or you don’t have flexibility when it comes to your travel plans, these cards can still provide rewards for your bucks.

The freedom to choose

So which card candidate meets your spending needs, offers the best value, and provides a route to cash back or rewards policy that fits your lifestyle? The choice is yours — or you can choose one or more of each.

Note, though, that with any cash back or rewards card — or any card — you should aim to pay your balance in full and on time each month, says Dennis. Otherwise, you’ll end up paying more in interest than you are earning in cash back, rewards or other perks.

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