Credit Card Points vs. Cash-Back—Which is Right For You?

While cash back in your pocket can at first glance seem like the more attractive option, credit card points are also extremely valuable when used correctly

When you use a credit card, you typically have the option of earning either credit card points or cash back on your spending. Both of these rewards are valuable, but they require different levels of time and consideration. The two systems also don’t merge well—having a mix of both cash-back cards and points-earning cards likely does not make sense unless you have a specific reason for doing so (e.g., the cash-back cards can also earn points).

Therefore, it’s important that you decide which type of reward is better suited to your goals and spending habits. In general, cash-back is the easier option with less overall value, while credit card points can return way more for your spending but often require significantly more effort and tracking.

In this article, we will guide you through the pros and cons of each in order to help you figure out if points or cash-back is the right set-up for you.

Let’s start with the basics.

What are Cash Back Rewards?

Cash back rewards are a type of credit card reward that gives you a percentage of your spending (typically 1-5%) back as cash on every purchase. As we mentioned earlier, cash-back is simple: you spend and earn cash. That’s it. No worrying about how you will redeem your benefits, since there’s only one option!

With cash-back, you only need to track your spending if you have a card with variable cash-back percentages (e.g., 3% on dining, 2% on travel, etc.). There are many different types of cash-back reward cards available, with different rewards rates and bonus categories. Some cards offer flat-rate cash back on all purchases (such as the Chase Freedom Unlimited, see below), while others offer higher reward rates on certain categories, such as gas, groceries, or travel (such as the Chase Freedom Flex, see below). Cash-back cards typically have no annual fee (unless they have major benefits), making them easier to get value from without having to do much planning.

The Chase Freedom Flex, which offers 5% cash-back on rotating categories every category

The Chase Freedom Unlimited, which gives 1.5% cash-back on all your purchases

Pros and Cons of Cash Back Rewards

There are several pros and cons to cash back rewards. Some of the pros include:

• Cash back is VERY easy to understand and to use effectively. You always know exactly how much you're earning, and you can use the money you get back however you want.

• Cash back is still beneficial even if you don't travel often, as it can be used for everyday purchases like groceries and gas (point-based cards often give much better value for frequent travelers).

However, there are also clear downsides to cash-back cards:

• The value of cash back is fixed, so you are unlikely to ever get beyond the fixed value of 1 cent per point. While points tend to vary in their worth, they can be worth up to 3-4 cents per point with the right redemptions

• Cash back rewards are often worth less than point-based rewards (depending on how points are redeemed).

Overall, if you want simplicity, cash-back is the way to go.

Let’s switch over to credit card point rewards.

What are Points Rewards?

Points rewards are a type of credit card reward that gives you points to the creditor bank’s platform that can be redeemed for a variety of things, such as travel, gift cards, and even statement credits. You can often either book travel using your points directly through the bank’s travel portal, or transfer your points to airline and hotel loyalty programs. This type of redemption can be incredibly valuable, netting you more than you could get from cash-back alone. However, point set-ups are inherently more complex than cash-back ones, as you’ll need to figure out how to redeem your points for good value.

While there are many different types of points rewards cards available, with different points values and bonus categories, most will give you substantial value for your money within certain ecosystems. Some cards offer flat-rate points on all purchases (such as the Capital One Venture and Venture X), while others offer higher points values on certain categories, such as gas, groceries, or travel (such as the American Express Gold card). For instance, the Chase Sapphire Preferred gives 3x points on dining, 2x points on all travel, 5x points on flights made using the Chase portal, as well as several other unique benefits.

The Capital One Venture X, which gives 2x points on all purchases

The Chase Sapphire Preferred, which gives scaled points back depending on the category of spending

Pros and Cons of Points Rewards

There are several pros and cons to points rewards. Some of the pros include:

• Points can easily be worth more than cash back, depending on how you redeem them. For most people, points will be worth more than cash-back for pretty much every redemption, with a rough minimum of one cent per point.

• Points can be transferred to airline and hotel loyalty programs, which can give you even more value for your rewards. We recommend doing this wherever possible to get the most out of your points.

Some of the cons of points rewards include:

• Points can be more difficult to understand than cash back.

• You need to be careful not to overspend in order to earn points. Many people end up over-spending in order to get points that are worth less than the money they spent. Read our article on Not Falling Into the Points Trap to learn more.

• Almost all points cards have annual fees, some of which can be significant. For instance, the American Express Platinum Card, largely considered a great travel card, costs $695 a year.

So which is right for you?

In the battle of cash-back vs. points, it all comes down to your spending habits and the level of commitment you’re comfortable with.

If you're looking for a simple and straightforward way to earn money back in your pocket without having to stress about spending, cash back is the option for you. However, iff you're looking to go on luxury trips or experiences for “free” and take advantage of travel redemptions, points are the option for you.

At the end of the day, your decision should be based on whether you want to decrease your spending (through cash-back) or have your spending enable unique experiences (through points).

We hope this article was helpful! Make sure to leave any questions below.