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Points vs Cash Back: Best Credit Card Rewards

Cash back credit cards are America’s favorite type of credit card. Around 56% of Americans prefer them to other types, according to credit card research by The Motley Fool Ascent. I can testify to their popularity — of the seven credit cards I own, five of them earn cash back.

And yet, as much as I love cash back credit cards, I also know they’re not always the best for maximizing rewards. While cash back cards are easier to use, cards that earn points or miles have more rewards potential. If you’ve never had a rewards credit card that earns points, here’s one reason you might want to ditch your cash back card for one today.

Cash Back is Fixed but Point Valuations Depend on How You Redeem Them

Let’s get to the point (no pun intended): Points often beat cash back because you can redeem them for higher valuations. To understand what that means, let’s recall how rewards credit cards work.

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Like cash back cards, rewards cards return a percentage of your spending back to you. But instead of giving you cash, these cards give you points or miles. The ratio of points to dollars depends on the credit card, but it will generally be higher when you redeem them for specific things, like travel.

For example, let’s look at a popular rewards credit card — the American Express® Gold Card. This card earns 4X Membership Rewards® Points per $1 at restaurants worldwide (plus takeout and delivery in the U.S.), 4X Points at U.S. supermarkets (on the first $25,000 each calendar year, then 1 Point), and 3X Points on flights booked directly with airlines or through amextravel.com (terms apply).

Let’s say you spend $10,000 on dining and U.S. supermarket purchases in a single calendar year. This would earn you 40,000 Membership Rewards Points. Since Amex points can be worth anything from $0.005 to $0.03 per point, you could potentially get $200 to $1,200 of value depending on how you redeem them. Terms apply, see rates and fees.

Let’s say you’re comparing this card to the Capital One Savor Cash Rewards Credit Card. This cash back card earns an unlimited 4% cash back on dining, entertainment, and for popular streaming services, and 3% cash back at grocery stores.

On the one hand, the two cards have comparable earn rates for dining out and select streaming services: 4X points versus 4% cash back. But whereas the Capital One Savor Cash Rewards Credit Card would give you a flat 4% back on this spending, the Amex Gold Card gives you the opportunity to flip those points into a higher value. For example, if you managed to get $0.0125 per point, the Amex Gold Card’s effective rate would translate into 5% back per dollar. Terms apply.

This variable valuation system is how rewards credit cards can outperform cash back cards, even when both have similar earning rates. While 4 points could be equal to 4% back (if the redemption value is $0.01 for every point), they can sometimes be worth more when redeemed in a different way. Understanding how a rewards credit card works, then, can go a long way in helping you squeeze out the most value.

Points Have More Potential, but Can Be Complicated to Use in the Most Effective Way

Most people can do the math above and agree there’s more potential in earning points than cash back. And yet not everyone is going to ditch their cash back credit card for one that earns points. Why? Because rewards credit cards can be complicated.

It’s true. Even in doing the math above, we had to make some major assumptions, such as getting more than the average value of $0.01 per point. This takes time, knowledge, and research to get right every time you redeem your points. Likewise, you may be limited in how you redeem your points, as only a handful of options will likely give you the best value.

On the other hand, cash back credit cards are fairly straightforward. Your card has an earn rate (or multiple earn rates), which determines how much cash back you’ll earn for each purchase. If your card earns 3% back on a $100 grocery bill, you get $3 in cash back. You can then redeem your cash back for statement credits, deposits into your checking account, gift cards, or other cash-related choices. No points, no miles, and no complicated valuation systems to navigate.

This simplicity, coupled with the generous earn rates on the best cash back credit cards, are why these cards are America’s favorite. While that doesn’t make them better than rewards cards for everyone, it does make them more accessible.

Conclusion

All things considered, the best choice depends on how much effort you’re willing to put into maximizing your rewards. If you prefer convenience, go with the cash back card. But, if you’re ready to upgrade your credit card game — and get more luxurious things like first-class tickets to Europe — it might be time to try your hand at a points-based rewards credit card.

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