Cash Back vs. Statement Credit: Understanding the Difference
One of the most popular credit card benefits today is the cash back offer. When your credit card issuer says “cash back,” it’s used as an umbrella term for a group of sub-offers. The most common types are statement credit and true cash back. How can you tell the difference?
In this article, we’ll help you distinguish between them. This lets you know exactly what kind of deal your lender is extending.
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Cash Back vs. Statement Credit: What’s the Difference?
Most times, your card gives you points for your purchases. These points may be acquired at $1 per point or extra points may be awarded to specific categories. Points can be redeemed for several offers. Sometimes, it is for goods or services from affiliate partners. Other times, it may be for travel benefits like flights, hotel credits, free nights, or discounts. Credit card points can also be redeemed for financial perks, such as cashback and statement credits.
An actual cash back offer effectively performs like a rebate. It gives the credit card customer a percentage of the purchase costs back to them. You can withdraw this money from your credit card account. The money leaves your credit card issuer’s system. You can spend it anywhere or save it in a different bank account.
With statement credits, your points are used to pay off a portion of your credit card bill. The points are assigned an equivalent dollar value and then transferred from the points (rewards) account to your credit card balance. The use of the cash is limited to within the credit card issuer’s system. It cannot be withdrawn, cashed out, or moved to an external bank account for use.
Is Cash Back Always the Best Option?
Whether or not cashback is the best option depends on the offers to redeem your points. We suggest you review all the available options before you make a decision. Sometimes, you get lucky and find a high-quality benefit in the options.
For example, credit card companies often have agreements with brands for specific products or services. You may pay less for a brand-name product if you purchase it with points. This is compared to buying from a retail store or the brand’s website.
How to Calculate the Value of a Point
You can use a simple technique to determine the best option. You will need to calculate the value of a point using cashback versus another way.
- Step 1: Divide the cash back you can get by the points you need to redeem. For example, you plan to get $20 money back, which takes 2,000 points. The value of the points is $20 ÷ 2000, or $0.01.
- Step 2: Do the same thing for each reward option you want. Consider a $100 statement credit that costs 100,000 points. The value per point is $100 ÷ 100,000, or $0.001 (1/10th of a cent).
In our example, the cashback offers the best value because 1 cent is more significant than a 1/10th cent.
Decide Which Option Is Best for You
Both cash back and statement credit can be helpful, but the difference is in how they are used. Remember to analyze all options carefully before selecting your choice. Calculating the offer’s value by points helps show the value in mathematical terms that you can compare. This helps clarify which option gives you the better deal.
Updated: January 23, 2024