Cashback or rewards?
If you're in the market for a new credit card, you might be wondering if one of these is right for you. After all, if you're going to use a credit card, you may as well get something out of it. Wouldn't you like to earn some cash back or airline miles when you swipe your card? Cashback credit cards and travel rewards credit cards typically have a few things in common, so let's get those out of the way first:
Similarities: Cashback and Rewards Cards
The annual percentage rate, or APR, can range significantly for either type of card, and some cards carry a variable-rate APR. Some cards offer a lower introductory APR for the first year or a chunk of free bonus points once you hit a certain spending level.
Unless you're applying for a credit card with a financial institution, you typically don't need to have another checking or savings account with the provider—but if you're applying for a card with your bank or credit union, you might need to have a checking or savings account first to qualify for the card.
Your bank might also offer certain perks for having several accounts with them. Many credit card issuers will offer low introductory APRs and more advantages during the first year that you have a new card, but incentives for long term customers are far less common. If you're shopping around for a new credit card, check first with your bank or credit union to see if they're running any good promotions. It's important to read customer reviews before you select a card, but take these with a grain of salt, too, as even the best-regarded credit cards have more than a handful of unhappy customers complaining online. People are often quicker to write a bad review when something goes wrong than they are to write about a perfectly pleasant experience.
Security measures for both types of cards will likely be similar, too. Most cards today have a security measure called the chip-and-PIN. Like the magnetic stripe on the back of the card, the chip contains all your card information, but unlike the stripe, it keeps your information safe with something called tokenization.
When used with a card reader, the chip issues a number, or token, unique to that sale. If cyberthieves hack into a retailer's database, they won't be able to use your card info to make phony duplicates. Instead, they'll come up with tokens upon tokens, none of which they can use to recreate your card. Chip-and-PIN only works if a retailer's point-of-sale system can read the chip. If you swipe your card, you're still exposed to the same risks. Ditto to online shopping. Card issuers are getting more creative in this area, though. One new option is the ability to freeze and unfreeze your card with an app on your phone. This way, you don't have to panic and call the card issuer for a new one if you think you've only misplaced your card.
Cashback Credit Card
A cashback credit card is simple. As you use your card and pay your balance, you earn back a certain percentage of your spending for a cash deposit or statement credit. Most cashback credit cards take one or two billing cycles to kick in, and they may require you earn a minimum number of rewards before you can redeem them.
Cashback credit cards usually operate on a point-based system. This system requires purchases often within certain categories, like gas or groceries. Some cards will have better-rewarded categories than others, but not all. Some creditors even rotate which categories reap the most rewards, to keep their consumer's needs met.
The percentage you earn back can range depending on the card. Sometimes the card issuer will also offer different values for different types of redemption—for instance, offering more for a statement credit than a direct deposit.
The Citi Double Cash card is one good option for those who pay down their balance monthly and don't need travel points. It's a basic cash rewards card, good for people who don't want to keep track of rotating categories or pay any annual fees.
Frequent travelers and ardent foodies might get a better deal out of a card that rewards travel and dining purchases. Capital One offers several rewards cards and its Premiere Dining Rewards card is a great deal for people who often dine out.
- Dining RewardsEarn unlimited 4% cash back on dining
- Introductory Annual Fee$0 intro for the first year
- Receive an unlimited 4% cash back on entertainment and dining.
- 2% at grocery stores.
- 1% on every other purchase.
- No rotating categories, and no sign ups necessary to earn cash rewards.
Cashback credit cards are far more flexible than travel rewards cards and are generally a better choice for most consumers. Even avid travelers may struggle to spend enough to get much value out of a travel rewards card when compared with what they would earn from a cashback card. Plus, you can use the cash you get back for whatever you want: Pay down your balance, do some grocery shopping or store it away for a vacation.
If you don't travel often, you'll likely get more bang for your buck with a cashback credit card.
Travel Rewards Card
As you spend with a travel rewards card, you earn points toward a travel expense, often airline miles or hotel stays. Travel rewards cards tend to be a little more complicated than cashback credit cards but they're a great deal for a certain type of consumer.
Some rewards cards tally up points when you use them for any kind of purchase, while other cards award points only when you spend on travel. Often, travel rewards cards have rules as to how you can redeem your rewards, as opposed to no-strings-attached cash. This type of credit card often offers an enticing signup bonus or higher rewards during the first year or two you have the card, meaning, the longer you have the card, the more you must spend to earn rewards.
Don't let that put you off, though. Travel rewards cards can be a great option for frequent travelers.
- Travel RewardsUnlimited 10X miles on thousands of hotels.
- Everyday RewardsUnlimited 2X miles per $1 on each purchase.
- Introductory Annual Fee$0
- Named "The Best Travel Card" by CNBC in 2018
- 50,000 bonus miles after 3k in spend in the first 3 months. (That's roughly $500 in travel credit)
- Unlimited 2X miles per $1 on each purchase
- Unlimited 10X miles on thousands of hotels
- Up to $100 credit on TSA Pre✓® or Global Entry applications
- $0 annual fee the first year
They're an excellent choice for international travelers because they often reward international spending more and seldom charge foreign transaction fees. Airline or hotel co-branded cards also often offer bonus perks, like free checked bags.
The Chase Ultimate Rewards series of cards is popular right now, with several different kinds of cards under this brand including both cash rewards and travel rewards. Their big selling point is that your points won't ever expire, so long as your account is open. Chase also boasts that it's easy to redeem rewards.
Read the fine print before you go with a travel rewards credit card. Do you earn travel points on all purchases or only travel-related purchases? How long will it take you to accumulate enough rewards points to be valuable? What is the likelihood you'll be able to use those rewards points?
If you travel frequently, and especially if you travel overseas, a travel rewards card might be the better option for you. Travel rewards cards can also be a good option for people who don't mind switching to another card after a few years when the rewards become a little less rewarding.
Most credit card lenders look at your FICO score when they decide your application. The FICO score ranges from 300 to 850, and the higher the better.
Generally, a score above 640 is considered prime or even super-prime, while a score below 640 would be poor or subprime. While every card is different, some very prestigious credit cards look for a very high FICO score, so if your FICO score is below 640, you might want to take a few steps to improve it before you apply for a new credit card.
Credit Card Fees
So far, we've covered the types of rewards you can earn with a cashback or travel rewards credit card, but it's also important you be aware of fees before you apply for either kind of credit card. Many cashback credit cards are free of annual fees. Travel rewards credit cards charge annual fees more frequently. As with both types of card, the better the rewards package the more likely it is you'll find an annual fee. The more premium travel rewards cards charge even higher annual fees than lower tiers. For some consumers, the rewards outweigh the hefty annual fees. Some of these premium travel rewards cards have even become popular with discerning millennials.
Travel Rewards or Cashback: The Conclusion
For most consumers, a good cashback credit card will make the most sense. The average American doesn't usually spend quite enough on travel to get significant value out of a rewards card, and these card issuers tend to place restrictions on how and when you can redeem those rewards you've accrued. But cash, you can use whenever and however you'd like. This makes a cashback card a much more flexible option.
Cashback credit cards also tend to be more consistent in terms of how they award points. One of the most popular options for cashback cards is the Citi Double Cash.
A travel rewards card might offer some enticing signup bonus points, but typically speaking those rewards will start to taper off after you've had the card for a few years. For certain consumers, a travel rewards card will make the most sense, though. If you fly frequently, you may get a lot of use out of perks like free checked bags. If you often travel internationally, you might like a card that's free of foreign transaction fees.
Do you have experience with either cashback or travel rewards cards?
Share your thoughts in the comments below!