Cash Back vs. Airline Miles: An Overview
Cash back cards and airline miles cards are two types of rewards credit cards. With both, you accrue something—in one case, money; in the other, miles or points—whenever you use the card to make a purchase. The more you spend, the bigger your bonus.
Of the two, the mileage cards have been around a bit longer—the first airline-specific credit cards were introduced in 1986-87. Although the first rebate card, Discover, debuted publicly in 1986, the cashback concept didn't really become common until the early 2000s.
- Cash back refers to a credit card benefit that refunds the cardholder's account a small percentage of the sum spent on purchases.
- With airline miles cards, you accrue miles (or points) with each purchase, good for travel on either a specific airline or your choice of carriers.
- In choosing between cash back and airline miles, think about what you want to achieve with your card spending—cash in hand or earning enough miles to redeem for travel.
- Before choosing a card, it's important to consider if you will earn enough in terms of cash back, points or miles to justify any annual fees.
- For cards with annual fees, look beyond any one-time bonus or first year annual fee waiver and calculate how much rewards value you will likely derive year after year with your typical spending patterns.
Cash back refers to a credit card benefit that refunds the cardholder's account a small percentage of the sum spent on purchases. As the name implies, this is actual cash that can be applied to a credit card bill or received as a check or bank account deposit.
While some cards pay the same percentage on all purchases, cash back levels often vary depending on the type of purchase or amount of purchase ($25 is usually the minimum spend). For example, a cardholder might earn 3% back on gas purchases, 2% on groceries, and 1% on all other purchases. Most pay 1%-2%, though some rewards can reach up to 6% of a transaction, though such rich returns are limited to categories of spending (like groceries) and are typically capped on a quarterly or yearly basis.
Cash back rewards are typically redeemed as a statement credit, which can offset a portion of costs incurred through monthly purchases. Consumers may also receive the cash reward directly by deposit to a linked checking account or through the mail by check.
Or they can apply the money to merchandise offered through the card issuer. Cash back rewards typically have fewer redemption options compared to points and miles-based rewards, but tend to be more straightforward in their value.
The big advantage of cash back credit cards is their flexibility. You can choose to spend that cash on travel, use it for other purchases you'd like to make, or simply put it into savings. However, if you carry a balance on your credit card month to month, even the most generous rewards program will be greatly offset, if not completely nullified, by the amount you are paying in interest.
Many cash back cards don't charge an annual fee, which saves the effort to determine whether a certain rewards value must be earned over the course of the year to justify the cost. That makes cash back cards a natural fit for people who don't spend a significant amount on credit cards.
There are two main types of travel cards that deliver rewards in miles or points: airline-specific co-brand cards issued in partnerships between airlines and banks, and more general travel cards that earn rewards that can be redeemed for travel on any air carrier.
Of the two, the co-branded airline miles cards are more limited, but they can be a good choice if your lifestyle involves travel—or you hope it will in the future (maybe you need a little motivation to start planning that trip to Spain). Usually, airline miles earn at about the same rate as cash back rewards (though airline cards often offer bonus miles for airline purchases and other categories like hotel, dining, or gasoline) and there may be a one-time bonus incentive offered in exchange for a certain amount of spending during the first several months the account is open.
General travel cards are the equivalent of cash back cards in their flexibility, rewards, and perks, except that the rewards must generally be redeemed for travel through the card issuers reward program portal and not through any airline's frequent flyer program.
The one-time bonuses can sometimes be the most lucrative rewards you will get out of your credit card, so it makes sense to satisfy the initial spending requirements involved. Premium airline-specific cards might throw in added perks, such as seat upgrades, waived baggage fees, priority boarding, or access to airport lounges.
Some miles cards (both general travel and co-branded airline cards) also let you use earned rewards for other travel redemptions besides airline tickets, such as hotel rooms or rental cars.
On the downside, airline-specific cards will often limit your ability to shop for the lowest-cost ticket because you are only earning and redeeming rewards with a single carrier. Sometimes, the rewards can be redeemed at more favorable rates, especially during off-peak travel times. However, if you are trying to travel during peak travel seasons or the holidays, don't expect many breaks. And beware of blackout dates that don't allow you to use points at all.
Also, while 68% of all credit cards don't charge an annual fee, two-thirds of these travel cards do—and they tend to be on the high side, often $75 or more. On the plus side, airline-specific cards' interest rates, which once skewed much higher than the average, now actually are lower than the typical APR.
A desirable miles-reward card also has no foreign transaction fees, the miles don't expire, and there are no blackout dates for redeeming travel points, which can be spent on any airline and hotel. Most general travel cards provide these attributes while co-branded airline cards often don't, ironically.
Before signing up for any card with an annual fee, consider the value of the first-year bonus along with its spending requirement and rewards earning rate to determine how much you will need to spend each year for the rewards value to at least equal the cost of the annual fee.
Figuring this out may be a little tricky because sometimes you have to convert miles into dollars, but it can be done. For example:
- Miles values can vary but are generally worth 1 cent per mile. If the bonus is 50,000 miles and each mile is generally worth $.01 so the bonus value would equal $500. You have to spend $3,000 within the first three months to get this one-time bonus. That's a 16.7% return on required spending.
- If a card offers 2x miles for every purchase. For every $1 that you spend, you earn $.02 in rewards value. (This is the same as earning 2% back.)
- The annual fee is $95. If earning $.02 for every purchase dollar, you would have to spend a minimum of $4,750 on your card each year (which is under $400 per month) to justify the annual fee. The one-time bonus would equal over 5 years of the annual fee, though, so this illustrates that travel rewards credit cards with annual fees can be a good deal if you redeem the rewards for their maximum travel redemption value.
The Bottom Line
In choosing between cash back cards and airline miles rewards, the main question is, which type of rewards card makes the most sense for you—given your goals and lifestyle?
Before choosing a card, it's important to consider if you spend enough to make it worth it since many rewards cards have annual fees. If not, there are still many credit cards that offer valuable rewards yet don't charge an annual fee.
Then, read the fine print. Are there any blackout dates that would limit your ability to use your travel rewards? Do your rewards expire? Are there ways for you to earn more, such as making online purchases through your credit card rewards website? Paying attention to these details can help you optimize your rewards so that you can get the most out of the benefits your credit card offers.
If you don't think you'll redeem earned travel rewards for airline tickets or hotel stays frequently enough to justify any annual fees involved, opt for the flexibility of a cash back card; you may earn a little less in terms of total value, but you will probably be able to enjoy full use of the rewards.