Travel Rewards vs. Cash Back Credit Cards: Make the Right Choice

Editorial Note:

If you travel frequently, a travel rewards credit card is an excellent credit card to add to your wallet. The most popular cards come with amazing perks and sought-after rewards programs. However, not every travel reward credit card is suitable for your circumstance. Your travel and spending habits will indicate whether a travel rewards vs. cash back card is best. Using our guide, you can understand each card and select the most appropriate card.

What Are Travel Rewards Cards?

A travel rewards credit card lets you earn points which are exchanged for travel benefits. You usually earn one point per dollar spent, although you could earn more. Travel rewards cards come in two types: general and loyalty. General rewards cards allow you to earn points that can be redeemed at any travel provider. Loyalty credit cards are tied to a specific travel provider’s loyalty program. You could be limited to shopping with the brand and its partners to earn points. If you aren’t locked into a brand, your card may offer more points per dollar when shopping within the brand. Loyalty cards only redeem rewards and points from that one brand and its partners.

Travel rewards cards are popular because they have great benefits. The most popular and exclusive cards offer large points-per-dollar-spent ratio, so you can earn rewards faster. Many travel rewards cards don’t charge foreign transaction fees when you make purchases internationally. They also grant non-financial perks, like a free checked bag, companion passes, airline lounge passes, and free upgrades. The biggest draw is usually the sign-up bonus. Most travel cards grant a sign-up bonus with enough points for a free round-trip ticket. All you must do is meet the spending minimum within the first three months of card ownership.

What Are Cash Back Credit Cards?

Cash back credit cards give customers a “rebate” on their purchases. The card may offer a flat rebate (around 1-2%), or the cash back may come in tiers. An example is your credit card that offers 3% on groceries, 2% on gas, and 1% on everything else. Cash back may be earned on rotating categories that change every three months. (If you have this kind of card, pay attention to the current categories to maximize your benefits.) Cash back cards give shopping related perks, like extended warranties, purchase protection, and credit monitoring.

The cash back earned is stored in an account with your credit card issuer. When you wish to redeem it, it can be withdrawn as a statement credit. (Very few cards offer redemption as checks anymore.)

Cash back is appealing because it gives a better return than the banks. Most bank accounts earn 0.10 to 0.25% in interest per year. Cash back cards offer a minimum of 1%, with some earning as much as 6% in certain categories. Cash back has the unique advantage where you can reinvest it, which allows it to grow with time. Even better, cash back is tax free.

In comparison, travel rewards card points can lose value with time as companies restructure their reward program. Cash back can be converted to cash and does not suffer this limitation. Travel credit cards generally have an annual fee (although there are a few exceptions). It isn’t difficult to find a cash back card with no annual fee. If you’re saving up for the big trip, cash back cards offer smaller sign-up bonuses than travel rewards cards. As a result, the spending threshold is smaller, but the perks aren’t as exciting. Cash back credit cards make it easier to earn and redeem points. Generating points on travel rewards card can be complicated; using them can be more difficult.

Travel Rewards

 Which Type Is Right For You?

Travel rewards vs. cash back credit card: which do you choose? Consider your answers to the following questions:

  • Are you a frequent traveler? Travel rewards cards offer better earning rates on travel-related spending. Frequent travels will get better usage out of the travel perks associated with a travel rewards card.
  • Do you travel abroad? A valuable feature of a travel rewards card is that it should not charge a foreign transaction fee. This can save you 3% on every purchase made abroad.
  • Do you plan to use your reward primarily to pay for travel? If you intend to use your rewards to pay for your next trip, then get the travel rewards card. If you prefer to use your rewards for something else, go for the cash back card.
  • Can you meet the minimum spending threshold for the sign-up bonus responsibly? Travel cards are glamorous until you need to commit thousands of dollars to pay for your bonus. If you can’t commit to spending and paying off an expensive sign-up bonus threshold, go for the cash back card.
  • Are you willing to pay a (high) annual fee? Most travel rewards cards come with a substantial annual fee, which helps pay for the benefits and reward program. Despite this, the annual fee may be worth the cost, so don’t immediately reject the idea. Assess what the card provides for the annual fee.
  • Are you patient enough to go deep into your credit card’s rewards program and other details? Travel rewards card can have difficult procedures to earn and redeem rewards. For example, you may need to book your flight through a travel portal for your miles to count. If you have the fortitude to navigate through the rewards program, follow up with the travel credit card. For customers who want a simple program, cash back credit cards may be better.

Choose Wisely

There is no universally right card in the travel rewards vs. cash back card debate. Both types offer benefits that appeal to a specific type of customer. If your spending habits and lifestyle are travel-oriented, then a travel rewards card is most appropriate. Perhaps you prefer cash, or spending your rewards on other things. It may be that you don’t travel often; then consider a cash back credit card.

Roman Zelvenschi

I started a digital marketing agency Romanz Media Group Inc. 12 years ago. Running my own business quickly taught me the importance of cash flow. Making sales was not enough, I had to have money in the bank to pay the vendors, staff and personal bills.

During those early stages of the company I learned how to get creative with debt and to save on interest cost. I paid for everything I could with a credit card to both get more points and to extend the payment date by 25 days (credit card grace period). I then utilized a 0% balance transfer offers to rotate this debt.

I learned a lot during this process and made a lot of mistakes. My key lesson is that the most important part of being financially independent is how much I managed to save, rather than how much I earned. Staying disciplined with savings and tracking spending is not easy and I tried many different methods to stay on track.

FinancialFreedom.Guru is a side project where I and my staff are trying to share the practical knowledge on how to understand finances and to build wealth.

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