Cash Back or Miles?

There are a lot of rewards credit cards available today. Some offer cash back while others offer miles. How do you know which type card will give you the best value?

CashBack or MilesBefore you make the decision, you should closely look at your lifestyle and particularly your spending habits. Does a good portion of your monthly income go towards everyday purchases such as groceries or gas? Or perhaps you spend a significant amount on entertainment items such as movie tickets, concerts, or dining out. Travel purchases may be a priority. Does your credit card statement reflect numerous airline ticket transactions and hotel charges? Examining your personal finances can go a long way in helping you decide which type of rewards program suits you best.

For the majority of people, cash back is the practical choice to make when given an option. Cash back reward programs are generally very straightforward- you earn anywhere from 1% to 5% cash back on purchases which is then credited to your account. Most people don’t travel often enough to make earning miles a solid value. In addition, miles can be devalued and being able to use your miles for an actual flight can prove difficult. However, this doesn’t mean that choosing miles is always a losing proposition. Sometimes it takes a bit more effort and maneuvering but there are numerous opportunities to make miles rewards beneficial. For example, most major airlines now have partnerships with at least 500 retailers- so purchasing through an airline’s website can earn you even more miles.

Ask yourself these questions before making a final decision:

  1. Are the APR and annual fee in line with the rewards? This holds true whether you’re getting cash back or miles. Before you cancel an airline card that has a $100 annual fee, think about your benefits. You may get a free checked bag on every flight you take (typically a $50 round trip fee) so you can easily recoup a $100 membership fee over the course of a year. If you pay off your balance in full each month the APR doesn’t really come into play- but if not, be sure to calculate what you are paying in finance charges each month.
  2. How frequently do you travel? If you consider one trip a year a lot- then you may have a difficult time realizing the benefits of a miles rewards program. But if you travel often, and especially internationally, you will most likely achieve elite status with your airline of choice. This translates into the ability to earn even more miles and upgrades. One free ticket earned can more than cover the cost of an annual fee.
  3. Do you routinely carry a balance? Credit cards that offer cash back rewards generally have higher APRs and require an excellent credit rating for approval. As stated previously, if you pay off your entire balance each month the annual percentage rate won’t affect you. But if you know you will probably carry a balance on the card, you should look for the lowest APR possible. Interest charges can quickly negate any rewards you may earn.
  4. How much do you routinely spend on your card? Cards that offer better rewards generally come with higher annual fees. But this only holds true if you spend enough to actually score the rewards. Consider this- if you spend $50,000 annually on a travel card that earns 1% back on every dollar you spend, you will earn enough for a free international airline ticket. So even though the travel card may have a $100 yearly membership fee- it’s still worth more to you than a no-fee card that earns 1% cash back. Your spending level is the key.
  5. What’s more important to you? Cash or travel? If travel is a big part of your life and you enjoy hitting the road (or boarding the plane), a miles rewards program may be the perfect fit for you and your lifestyle. If you’re saving for a home or travel isn’t a big priority, a card which gives you cash back on purchases might be the better choice.