Opinion: Points or Cashback
“Should I be earning points or cashback?” This is one of the most commonly asked questions I get asked all the time. Both cashback and point earning credit cards have their pros and cons, and it can be a challenging question to answer. I’ve laid out a few advantages and disadvantages for each side of the argument, and I hope this article serves as a useful guideline to determine which route you should take in your credit journey.
Advantages of Earning Cashback
The phrase “Cash is king” didn’t come out of the blue. Companies go bankrupt and points and miles get devalued over time, faster than the rate of inflation. Unlike points and miles, which require transfers and conversions, earning cashback is the most straightforward return-on-spend there is. The Citi Double Cash Card earns 2% back on all purchases, and that is easy to keep track of if a cardholder doesn’t want to bother remembering spending categories or multipliers. Besides, you exactly know how much value you are getting in return. For instance, the Blue Cash Preferred Card from American Express (AMEX) earns 6% back on groceries, up to $6,000 per year in purchases. If your monthly grocery bill is about $500, you can expect you’d earn $360 back every year. That $360 can go towards emergency funds or a date night at a fine dining restaurant, rather than being stored as reward points.
The Citi Double Cash Card earns 2% on all purchases, making it an painlessly simple card to use. Photo credit: www.citi.com
That brings another pitch to the table; You can use cashback at any time without worrying much about limitations such as redemption rates or blackout dates. If you were to spend a night at W Miami, depending on the date you select, the redemption rate can significantly increase. Take a look at the redemption rate for January 4, 2021:
You can either use 40,000 Marriott Bonvoy points, or…Photo credit: www.marriott.com
It would cost 40,000 Marriott Bonvoy points for a night. However, the nightly redemption rate for January 10, 2021, for the same room type would cost 60,000 Marriott Bonvoy points. Considering that one Marriott Bonvoy point is valued at 0.8 cents per point, the 33% difference in points can be translated to $160.
Use 60,000 Marriott Bonvoy points for the same room. Photo credit: www.marriott.com
Now, take a look at cash redemption rates for both dates:
You would pay $391 (before taxes and fees) for a night on January 4, 2021…. Photo credit: www.marriott.com
And you’d pay the same amount for a night on January 10, 2021. Photo credit: www.marriott.com
As you can see, the cash rates stay the same for both dates. Though this is not always true for every case, in general, you do have to put time and effort to decipher which date yields the most potential value. Cashback enthusiasts don’t need to worry about dynamic reward rates because cashback is crystal clear when it comes to redemption.
Disadvantages of Earning Cashback
The earning rates for cashback credit cards are usually much lower than the points and miles earning rates. Moreover, if the cashback rate is higher than normal, there generally is a cap on the maximum amount you can earn. Take a look at the Citi Double Cash Card; It is considered one of the best cashback credit cards for its flat earning rate of 2%. If I were to use my AMEX Gold Card at restaurants, I would earn 4% back on dining, double the amount of the Double Cash Card, and that 4% back in Membership Rewards (MR) points can be valued higher if I were to transfer them to airline or hotel partners. Let’s look at a different example. The Blue Cash Preferred Card from AMEX earns 6% back on groceries, up to $6,000 per year in purchases. After you pass the $6,000 threshold, the earning rate drops to 1%. Unless you are a single person or a couple, an average family of four would easily surpass the $6,000 yearly mark on grocery expenses.
The Blue Cash Preferred’s 6% back on groceries is great for a single person but not for an average family of four. Photo credit: www.americanexpress.com
Lastly, most cashback credit cards have minimum redemption requirements. The Citi Double Cash card has a minimum redemption requirement of $25. This means you must spend and pay at least $1,250 in order to cash it in for $25. The same goes for the PNC Cash Rewards Card. The card earns 4% back on gas purchases, 3% back on dining, 2% back on groceries, and 1% back on everything else. However, the card limits the higher-earning rates for the first $8,000 in combined purchases annually, and in order to redeem cashback, the reward amount has to be at least $25.
Don’t get too excited when you see nice cash back earning rates. Usually, there is a catch. Photo credit: www.pnc.com
Advantages of Earning Points & Miles
Compared to cashback credit cards, points credit cards can earn you a lot more in potential value. Each brand or bank has its own system, and these pseudo-currencies all have their potential values. AMEX’s MR points traditionally valued at 2 cents per point, and Hyatt points are valued at about 1.7 cents per point. Keep in mind, these valuations are subjective guidelines on what the minimum redemption threshold should look like. Thus, depending on how you redeem them, the values can go up or down, and everyone should preferably strive to score higher than those valuations to come out “ahead”. To illustrate, one night stay at Andaz 5th Avenue in New York City can cost $749.38 on new year’s eve. When you use Hyatt points, you only need 25,000 points, which means each Hyatt point is now worth 3 cents per point for that specific redemption.
25,000 Hyatt points makes sense given how expensive the cash rate is for that night. Photo credit: www.hyatt.com
3 cents per Hyatt point is great, and you can score even higher at the right property! Photo credit: www.hyatt.com
Personally, I would not pay more than $200 a night for a hotel, and that is another beauty of using points and miles; They allow people to do luxurious and aspirational trips that people wouldn’t normally pay for. These trips could be international first or business class tickets, suite hotel nights, or even emergency trips. Last-minute flights usually have extremely high cash prices. With points and miles, you’d still pay more than normal, but the total redemption would be more justifiable and not be outlandishly harsh. When you do some research and find a sweet spot for redemption, you can land on some great deals, raising the potential value of the points and miles over cashback.
Luxury getaways become more approachable with points and miles.
Furthermore, credit cards that earn points come with more benefits such as travel protection, purchase protection, baggage protection, primary rental car protection, and more. The general rule of thumb is that the more expensive the annual fee is the more extensive the benefits are. These perks give credit card users peace of mind when traveling or buying costly items. When I book my flights, I make sure to use the AMEX Platinum Card for its trip delay coverage. The flight probably won’t be delayed but in case it does, I have the coverage I need. The same goes for whenever I purchase expensive electronics. I purchased my Macbook Air and iPad using the AMEX Platinum Card for its purchase protection perk, which serves as another layer of insurance.
The AMEX Platinum Card provides great purchase protection for expensive items such as laptops and cameras.
Disadvantages of Earning Points & Miles
Points and miles earning credit cards usually have higher annual fees, and that is because the cards have more benefits and perks. Going back to the Chase Sapphire Reserve Card, the card has great perks including $300 travel credit, $60 DoorDash credit, $100 towards the TSA Pre/Global Entry application fee, primary auto rental coverage, and many more. However, these perks come with an annual price tag of $550, which may be more than what most people feel comfortable paying for. Luxury credit card benefits sometimes make people fail to account for the card’s high annual fee, and unless those benefits are the expenses that would normally incur, credit card users have to spend a lot more to justify the effective annual fee. Thus, it is crucial that you analyze your spending patterns and normally incurring expenses to find the best card that fits your portfolio.
Premium travel credit cards often offer credits towards travel, but the cards usually have high annual fees to account for those “free” perks.
Another disadvantage of earning points and miles is that points and miles do not hold actual values until they are redeemed. On top of that, they get constantly devalued, and the terms and conditions change as card issuers adjust their strategies. Let’s say I have one million MR points in my AMEX account. Given that MR points are generally valued at 2 cents per point, can I say that I have approximately $20,000 worth of points in value? I certainly can assume that they have the potential to be valued at $20,000, but it has zero value if they are not used. Besides, AMEX can considerably belittle MR points, and my holding could be slashed significantly. Another example of devaluation can be found at United Airlines. For example, United Airlines increased most partner award costs by 10% as well as award costs close to departure for award partners and United flights. As a result, United miles became less valuable than before, and I presume that the value will continue to depreciate rather than appreciate in the future.
Points and miles get devalued faster than the rate of inflation so use them when you can.
Lastly, points enthusiasts have less flexibility when it comes to redemption, and that is especially true if one wants to get the most bang for the points. Over recent years, many hotel chains have recently adopted dynamic pricing models. Sometimes the approach is as aggressive as the Hilton’s model, where 80,000 Hilton Honors points can get you either a night at Garden Inn or at Conrad, or as subtle as Hyatt’s model, where properties have off-peak and peak prices. In the previous W Miami example, being flexible with dates could save 33% of the points used for redemption.
Summary
As you can see, when it comes to deciding between points and cashback, there is no perfect answer. Cashback users don’t have to worry about redemption rates or other restrictions such as blackout dates. Cash will hold its value better than miles and points, and you are not tied to a specific point system, allowing you to allocate cashback funds to any expenses. However, cashback earning rates are usually much lower than points earning rates, and you may need to spend a significant amount before you can redeem it for cashback. When earning points and miles, you can earn them faster since travel premium cards have higher earning rates. These cards are equipped with great benefits but also come with annual fees. Redeeming points and miles can be a double-edged sword. if you do some research, you can get awesome deals, but that may require flexible travel plans. After reading the article, if you still need some help deciding which one to go for, check out my free consultation page, and I can guide you further and help you choose the best credit card for your wallet.
