5 things to keep in mind when you're deciding between a rewards card and a cash-back card

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  • As credit card issuers change and devalue their points programs, you might debate the merits of opening a cash-back card instead.
  • Cash-back cards have their advantages: They generally don’t have annual fees, there are no restrictions on how you can redeem that cash, and you can keep earning miles, points, and status when you book with cash back.
  • However, points earned through rewards cards are usually more valuable than cash, especially if you’re a frequent traveller. Points-earning cards also usually have lucrative sign-up or welcome bonuses.
  • Read more personal finance coverage.

Rewards-earning credit cards have gotten increasingly popular in the last few years, and with that we’ve seen loyalty programs devalue and award redemptions become more difficult. So, is it time to switch to cash-back cards? Below, see how cash-back cards stack up against those that earn rewards and points instead.

Keep in mind that we’re focusing on the rewards and perks that make these credit cards great options, not things like interest rates and late fees, which will far outweigh the value of any points or miles. It’s important to practice financial discipline when using credit cards by paying your balances in full each month, making payments on time, and only spending what you can afford to pay back.

Cash-back cards generally don’t have annual fees

While most rewards-earning credit cards carry annual fees ranging from $US50 to $US550, cash-back cards tend to be fee-free.

Several cards that earn at least 2% cash back during the first year have no annual fee, like the Citi® Double Cash Card, Fidelity Rewards Visa Signature Card, and Discover it® Cash Back. If you put a good amount of your spending on one of these cards can add up to substantial rewards.

If you want a card that earns you bonus cash back on certain spending categories without having to pay an annual fee, you have options, too. Here are some of the best ones:

  • Wells Fargo Propel American Express® card Earns 3x points (3% return) on categories like travel and gas stations
  • Chase Freedom Earns 5% cash back on rotating quarterly bonus categories up to $US1,500 in purchases each quarter you activate
  • Ink Business Cash Credit Card Earns 2% to 5% bonus cash back on select categories tailored to business users (on the first $US25,000 in combined purchases each account anniversary)

Once you tally up your earnings for the year, there’s no need to compare the value gained from the rewards to the annual fee you’re about to pay. Thus, you don’t have to contemplate whether a card is worth keeping or not because of the annual fee.

There are some exceptions to this no-annual-fee rule, like the Blue Cash Preferred® Card from American Express, which has a $US95 annual fee. This card earns 6% back at US supermarkets on up to $US6,000 per year (then 1%) – but if you spend $US6,000 at US supermarkets in a year, you’ll earn $US360 back with this card, so it could be worth paying the fee.

But cash-back cards have much smaller sign-up bonuses

While rewards-earning cards will sometimes offer sign-up bonuses as high as 100,000 points or miles, cash-back card bonuses rarely crack $US500. The popular Chase Freedom Unlimited, for instance, currently offers a $US150 bonus after you spend $US500 on purchases in your first three months with the card.

That being said, several cash-back cards offer lucrative recurring category bonuses that make up for the lack of sign-up bonus. For example, the Discover it Cash Back offers 5% cash back on rotating categories on the first $US1,500 in purchases each quarter you activate. On top of that, Discover matches all cash-back earned during the first year. That translates to 10% cash-back on rotating bonus categories with the Discover it Cash Back. So while you’re not getting any cash back to start, there is often potential to earn more rewards.

Points are more valuable than cash, but subject to devaluation

Most award travel experts will tell you points are more valuable than cash back. But with airlines and hotel rewards programs devaluing their currencies and doing away with award charts all together, cash back is becoming increasingly more useful.

Cash-back rewards don’t devalue – 1% cash back will always equal 1% cash back. In fact, with so many airlines offering cheap flights to Hawaii, Europe, and Asia year-round, using cash-back rewards might make more sense than redeeming miles for flights.

Frequent travellers often assign values to their airline miles that will dictate when redeeming them is the best value. There’s no need to analyse redemption value with cash-back rewards. That’s a nice benefit for folks who don’t want to spend time learning about redemption values and maximizing miles.

There are no restrictions on how you can redeem cash

Sometimes when you’re redeeming points for a hotel, a standard room won’t do. Maybe it’s a special occasion and you want to book a suite or you’re travelling with a group and need a bigger room. With hotel rewards programs, suites will often require 50% more points and not all premium rooms are available on award stays. That’s where cash-back comes in: You can book any hotel room without restricting yourself to a specific room type because you’re redeeming rewards.

The same goes for premium airline redemptions. While booking first-class travel gets you the most bang for your miles, airlines are increasingly turning toward dynamic pricing. At this rate, premium seats may not even be attainable in the near future. On the other hand, airlines are increasingly discounting premium fares, making cash bookings more favourable than redeeming miles.

Cash-back rewards can be used for any travel booking, at any time. No blackout dates or redemption limitations to worry about. That flexibility can come in handy when hotels are sold out in a particular city and the only accommodations available are on Airbnb. Or perhaps an airline is blocking off award space during peak travel dates. With cash-back rewards, you can book a flight or hotel without being restricted by a particular reward program.

Booking with cash instead of points helps you earn airline and hotel status

With most airline and hotel loyalty programs, you will not earn points or elite status credits on travel booked with points. This is clearly not the case if you’re using cash-back rewards to book travel.

Paying for travel with cash-back rewards enables you to earn points, miles, and elite-qualifying credits just like if you were to use regular cash. So not only can you cover travel expenses with a cash-back card, you can also continue earning points and elites status through airline and hotel rewards programs.

Earning elite status is pretty valuable if you’re a frequent traveller and want benefits like upgraded accommodations, free breakfast at hotels, and accelerated earnings on paid travel.

Consider diversifying your rewards with both points and cash back

If you’re open to paying an annual fee for one solid card, a good compromise could be to open a no-annual-fee cash-back card like the Wells Fargo Propel or the Chase Freedom Unlimited as well as a rewards card that earns points.

The Chase Sapphire Preferred Card has a $US95 annual fee, but it could be well worth it thanks to the sign-up bonus of 60,000 Ultimate Rewards points after you spend $US4,000 in the first three months. Plus, if you pair the Chase Freedom Unlimited or the Chase Freedom card with a Chase card that earns Ultimate Rewards points, you have the option of moving over your cash-back rewards to redeem them as full-fledged Ultimate Rewards points that can be transferred to airline and hotel partners. This strategy would give you the flexibility to choose between cash back and rewards based on your priorities and travel plans.

Click here to learn more about the Chase Freedom Unlimited.

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