Understanding Cash Back vs, cash back level travel

Cash Back vs. Airline Miles: What's the Difference?

Choosing Between Cash Back and Airline Miles

Cash Back vs. Airline Miles: An Overview

In choosing between cash back and airline miles rewards, the main question is, which type of rewards card makes the most sense for you? It makes sense to pick the package that fits your goals and lifestyle.

Before choosing a card, it's important to consider if you spend enough to make it worth it since many rewards cards have annual fees. If not, there are many no-fee credit cards that offer rewards that are truly free.

Then, read the fine print. Are there many blackout dates that would limit your ability to use your travel rewards? Do your rewards expire? Are there ways for you to earn more, such as making online purchases through your credit card rewards website? Paying attention to these details can help you optimize your rewards so that you can get the most out of the benefits your credit card offers.

Cash back reward credit cards have the advantage of flexibility. You can choose to spend that cash on travel or use it for other purchases you'd like to make. If you carry a balance on your credit card month to month, even the most generous rewards program will be reduced by the amount you are paying in interest (this is how credit card companies make their money, after all). Rewards aren’t free if you are paying a high interest rate to earn them.

Cash rewards can reach up to 5 percent of a transaction. Some transactions also offer double rewards through merchant partnerships. The reward usually takes form as a statement credit, which can cover a portion of costs incurred through monthly purchases. Consumers may also receive the cash reward directly by deposit to a linked checking account or through the mail by check. Some cash back rewards may only be used with specific purchases including travel, electronics, or partnership incentive programs.

Typically, the cardholder must reach a certain transaction level to qualify for cash or other benefits, usually around $25, but it varies from card to card. Some credit cards offer varying levels of cash back, depending on the type of purchase or transaction level.

Airline Miles

There are two main types of travel cards that deliver rewards in miles: airline - or hotel-specific cards, and more general travel cards.

Miles are more limited, but they can be a good choice if your lifestyle involves travel—or you hope it will in the future (maybe you need a little motivation to start planning that trip to Spain). Usually, airline miles build up at about the same rate as cash rewards (1 percent or 2 percent is standard) and there may be an incentive for signing up.

The sign-up bonuses are probably the best rewards you will get out of your credit card, so take advantage while you can. Some miles cards also let you use the points for other travel purchases besides airline tickets, such as hotel rooms or rental cars.

Airline - or hotel-specific cards will limit your ability to shop for the best deal because you are only earning rewards with one company, but the points can sometimes be redeemed at rates that are more like 3 percent or 4 percent (rather than the 1 percent or 2 percent of a cash back or general travel rewards card). This is especially true during off-peak travel times—if you are trying to travel during the holidays, expect lower reward returns and beware of blackout dates. Airline-specific cards might throw in added perks, such as free upgrades, waived baggage fees, priority boarding, or access to airport lounges.

General travel cards have the benefit of flexibility among companies but will get similar rewards rates as a cash reward credit card. Don’t expect to get upgrades or special treatment with a general travel credit card; this type of card is the equivalent of a cash rewards card in its payoffs and perks, except that the rewards must generally be spent on travel.

If you don't think you'll use travel rewards enough, and you can't spend them in enough places, opt for the flexibility of a cash back card; you may earn a little less, but you will probably be able to take greater advantage of the benefits.

Special Considerations

Before signing up for a card with an annual fee, look beyond the first-year signing bonus or fee waiver and calculate how much you will need to spend each year to break even. Figuring this out may be a little tricky because sometimes you have to convert miles into dollars, but it can be done. For example:

50,000 miles = $500 in travel. That means each mile = $.01. (You have to spend $3,000 within the first three months to get this one-time bonus.) You earn 2x miles for every purchase. For every $1 that you spend, you earn $.02 in rewards. (This is the same as earning 2 percent back.) The annual fee is $95 after the first year. Earning $.02 for every dollar you spend means you will have to spend a minimum of $4,750 on your card each year before you start earning free rewards.

A desirable travel card also has no foreign transaction fees, the miles don't expire, and there are no blackout dates for redeeming travel points, which can be spent on any airline and hotel. Also, there is usually no introductory APR for purchases or balance transfers.