Credit cards can have many benefits, such as purchase protection and credit monitoring. But one of the most important benefits of using a credit card is cash back or rewards. These benefits let you earn a percentage of every purchase, which you can redeem in different ways depending on the card.
If you can avoid interest charges on the credit card, then cash back and rewards are like free money. But they also serve different purposes, and neither cash back nor rewards is better for everyone or in every situation. Below, you’ll find expert input to help decide when it makes more sense to focus on cash back versus rewards.
Are Annual Fees Worth It?
Minimizing fees can be the most cost-effective way to take advantage of credit card rewards. This is especially true if you aren’t a frequent flier or a big spender in general, as annual fees can wipe out the rewards you earn. However, a card with an annual fee can be worth it for many credit card users. There are several cards with manageable annual fees. Some even waive the annual fee in your first year.
Ultimately, choosing a credit card comes down to how you will use it, says Freddie Huynh, vice president of data optimization for Freedom Debt Relief. “The decision to go for a rewards card — even one without an annual fee — really comes down to realistically evaluating whether you will really use the benefits that come with the card,” Huynh says.
So, is a credit card with an annual fee worth it? Again, it depends. “If you are committed to using them, and can be flexible enough to use them, it could be worth it. But if you’re earning rewards and not using them, paying an annual fee is akin to throwing money away.”
Cash Back or Rewards?
As we have begun to establish, we can’t say that cash back is better in all cases. The same applies to travel rewards. The better choice comes down to how you use your credit cards. “Despite what you see in the commercials, there’s no ‘best’ credit card that all consumers must absolutely have,” says Monica Eaton-Cardone, founder at Chargebacks911. “It all depends on your values, priorities, aspirations and spending habits,” Eaton-Cardone says.
You shouldn’t choose a credit card that looks good and fit your habits to it. It should be the other way around — your spending habits should narrow it down to a few quality candidates.
“For example, do you love to fly?” asks Eaton-Cardone. “Then Capital One Venture or Discover It Miles might make sense. If you’re a travel junkie, find a card with miles. But if you rarely fly, perhaps you should choose a card with different benefits.”
Can’t Decide? Try Flexible Points
While your spending habits should ideally determine what to prioritize, that isn’t always easy. Perhaps your plans are up in the air for the next year, and you aren’t sure how much you will travel. In that case, one option is to use a credit card with flexible points.
These credit cards are those with points you can redeem for cash back or travel, and they are valuable in either situation. “The best flexible points are those you earn with cards like Chase Sapphire Preferred, Chase Sapphire Reserve, and the Chase Ink Business cards,” says Scott Lieberman, founder of Touchdown Money. “That’s because 100,000 Chase points with these cards are worth $1,000 cash or $1,250 to $1,500 for travel depending on which card you have,” Lieberman says.
In other words, the points are valuable whether you use them for travel or redeem them for bach back. “For instance, I turned my Chase points that could’ve been worth $2,800 in cash into two round-trip Business Class flights to Europe that would’ve cost me $16,000 if I were rich enough to pay cash,” Lieberman says. But you can also redeem those points for cash if you don’t travel much.
Pros and Cons of Cashback Credit Cards
Let’s briefly examine the pros and cons of cashback credit cards.
Pro: Ease of Use
Cashback credit cards are simple and easy to use, making them an attractive choice. “Using a cashback credit card is similar to getting paid to make purchases you would have made,” says Lyle Solomon, principal attorney at Oak View Law Group. “Alternatively, an automatic discount is applied to all purchases made with the card,” Solomon says. “Significant annual cash-back earnings are undoubtedly possible for big spenders.”
Cashback credit cards are flexible and allow you to earn discounts in several forms. For instance, they often give you a choice between a statement credit, a mailed check or a direct deposit into your bank account.
Pro: Saves Money
“Cashback credit cards can help you save a lot of money on every payment, so this shouldn’t surprise you,” Solomon says. “Many cashback credit cards don’t have annual fees and come with low APR.”
Con: Rewards Rates
You may find that cashback credit cards have lower rewards rates. Typically, the highest cashback rate you will find is 5%, while some rewards travel portals earn up to 10 points per dollar.
Pros and Cons of Rewards Credit Cards
Now, we’ll consider the pros and cons of rewards credit cards.
Pro: Welcome Bonuses
Welcome bonuses are meant to encourage people to sign up for credit cards, but they can also be lucrative. “After fulfilling a spending limit within the first few months of card membership, the card might give you a lump payment of cashback, points, or miles for a finite period,” Solomon says. “As a welcome bonus, some reward cards offer high-value points or miles.”
Pro: Perks Can Outweigh Fees
Rewards credit cards often have fees (especially travel rewards cards), but their perks can often outweigh the fees. These credit cards often have many benefits, such as high cashback rates on travel, lounge access, and travel insurance. For the right cardholder, the fees can be worthwhile.
Pro: Rewards Rates
As mentioned earlier, travel rewards credit cards often have the highest rewards rates, such as when booking travel through a credit card travel portal.
Con: Annual Fees
Ideally, annual fees on rewards credit cards shouldn’t be a problem if you are using the card to its full potential. Nevertheless, some travel cards can have annual fees of up to $695, which is a tough pill to swallow.
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