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Should I Choose a Cash Back or Travel Rewards Credit Card?

Credit Cards

Should I Choose a Cash Back or Travel Rewards Credit Card?

There are two different types of rewards credit cards to choose from: cash back or travel rewards. Both have their advantages and disadvantages. Considering the card benefits & rewards you will benefit from the most will help make your decision easier.

Cash Back Credit Cards

A cash back credit card allows you to receive a small percentage of cash back from each purchase. For example, if your credit card has a 1% cash back reward and you spend $1,000 this month, you will get $10 back!

The best cash back credit cards have a reward rate of 1.5% to 2% on most purchases, although, it’s possible to receive a reward rate as high as 5% to 7% on select purchases.

Cash Back Credit Cards Are Ideal For…

Cash back credit cards are a great option if you want simplicity. Whether you choose a flat-rate card that pays 1.5% on every purchase or a tiered rewards card that pays 5% on groceries and 1% on everything else, you get money back in your wallet each month.

Unlike travel rewards, cash rewards have a lot of flexibility because you are paid in cash. You can put that money back into your savings account, invest it, visit a fancy restaurant…the options are limitless.

You will also like cash back credit cards, because many of them with the highest reward rates do not charge an annual fee. This means you get to keep every penny you earn in rewards.

If you decide to use a cash rewards credit card with an annual fee, you will need to calculate the “break-even” point when you start profiting from the rewards. As an example, if your card has an annual fee of $39 and a 1.5% reward rate, you will need to spend $2,600 just to earn enough cash back rewards to pay the annual fee. If you have high monthly balances, the higher reward potential can more than justify the annual fee.

Travel Rewards Credit Cards

If you like to travel, a travel rewards credit card could be the better option. There are two different types of travel rewards cards: flexible travel rewards and loyalty program rewards cards. One thing to keep an eye on is the redemption rates.

One thing to keep an eye on is the redemption rates. With a cash rewards card, you know your exact reward rate with each purchase of at least 1%. Travel rewards cards, on the other hand, often allow you to accumulate points quicker but can have redemption ratios of 1% or less.

Flexible Travel Credit Cards

The first type of travel credit cards, flexible travel rewards cards, allow you to redeem credit card points on nearly on travel purchase from airline tickets, hotel stays, or rental car reservations.

Most flexible travel rewards cards, including the best flexible travel rewards credit card, often award you bonus points on travel & restaurant purchases such as 2 points per $1 spent and 1 point per $1 spent on all non-travel/restaurant purchases, regardless of the airline or hotel.

You can redeem the points with any travel provider. And, some cards allow you to redeem points to get a statement credit on travel purchases of 1% or 1.5%, so it’s like a cash back reward but only for travel purchases.

If you are not loyal to a particular airline or hotel, this is the better of the two options.

Airline & Hotel Rewards Cards

If you want to redeem credit card rewards for a particular airline or hotel program, going with a loyalty rewards credit card is the better bet.

Every major hotel & airline has their own version of these cards. They often have a tiered rewards program that awards you more points for brand-specific loyalty programs. For example, the IHG Rewards credit card award you 5 points for every IHG hotel stay (Holiday Inn Express, Candlewood Suites, etc.). But, if you stay at a non-IHG portfolio hotel like a Marriott or Hyatt, you will only earn the base rate of 1 point per $1 spent.

When it comes time to redeem points, you can only redeem them within the loyalty program.  Not a problem if you constantly stay at IHG, fly United, etc., but, not a great deal if you simply look for the lowest price regardless of the carrier. You might have the option to transfer them to another travel partner, but, these transfer ratios are often undervalued and your points can significantly drop in the value.

 Annual Fee or No Annual Fee Travel Credit Cards?

Unlike cash rewards credit cards where you can usually thrive with a no-fee card, travel rewards cards with annual fees are often the better option. Especially if you want it to be your primary credit card. If it’s a secondary card, choosing a no-fee card is probably the better option if you want to score a quick sign-up bonus and gradually accumulate points on your periodic trips.

Annual fee travel rewards cards usually offer incentives like one free hotel night annually or free checked bags that often outweigh the fees after one or two trips. If you don’t plan on using these additional card benefits, going with a no-fee card that only accumulates points is better.

The Verdict: Cash Back or Travel Rewards?

If you like to travel, a travel rewards credit card is probably the best long-term option. You will only need to decide if you want a flexible rewards card or one that is specific to a single loyalty program. After that, you will need to determine if an annual fee credit card is the better option for you.

Cash back rewards cards are the better option if you don’t travel frequently or simply want the flexibility that comes with cash and not being restricted to only redeeming your points for airline tickets or hotel stays.


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