So far I haven't mentioned "Cash-Back" credit cards. I don't personally like them.
My goal for this game is to extract maximum value for each dollar I spend. That means when I decide to redeem my points, I want it to be for a flight or a hotel stay that has a paid value exponentially higher than what I would get using a cash-back card.
In a future post I'll walk you through the difference between a good and bad redemption, but here I will use a base-case scenario to illustrate the difference between earning cash back and points/miles.
Obviously some people don't want to deal with the hassle of the points game, and that's fine. But my goal here is to get you maximum value for minimum expense.
How Cash Back Cards Work
Cash back is self-explanatory- you will get a percentage of your spend back in the form of cash. If you spend $100 and your cash back rate is 3%, you will earn $3. All credit card rewards are really a rebate on your spend, but cash back is the most basic.
The main advantage with cash back is you know exactly what your return will be. There's always a possibility you won't be able to redeem your points for what you want, and you don't have to worry about your points or miles being devalued.
Generally, cash-back card signup bonuses are very low, usually maxing out at $100 statement credits. While that's nice, it's not maximizing value.
Let's walk through a basic example of your return:
We'll use a spend breakdown of $1,000/month on your credit card with $500 on dining, $300 on groceries, $125 on utilities, $75 on gas using Citi's DoubleCash Card, which earns 1% when you swipe and 1% when you pay your bill, for an effective rate of 2%. There is no annual fee on this card. There is no signup bonus.
At $12,000 in spend for the year, you will earn $240 in cash back. With no annual fee, your return will be $240. That's very good.
Now let's look at your return if you used the Chase Sapphire Preferred with a $95 annual fee that is waived in year one. I am assuming you'll hit the $4,000 in 3 month spend requirement to get the signup bonus. I'm just using $1,000 as an average to make it simple. This card earns 2 points per dollar on travel and dining and one point on everything else, and comes with a 50,000 point signup bonus.
Dining spend of $500/month gets you 12,000 points @ 2 points per dollar.
Grocery spend of $300/month gets you 3,600 points @ 1 point per dollar.
Utility spend of $125/month gets you 1,500 points @ 1 point per dollar.
Gas spend of $75/month gets you 900 points @ 1 point per dollar.
Total Points Earned: 18,000 points
Chase Ultimate Rewards Points Value = 2.1 cents/point (according to The Points Guy's August valuation)
Value = 18,000 x 2.1cents = $378
When you factor in the signup bonus of 50,000 UR points, you can add another $625 in estimated value in year one.
As you can see, even excluding the signup bonus you get more value out of a point-earning credit card than a cash back card.
One Step Further
Say you spend $25,000 in one year, around $2,000/month. Generally, you should be able to average 2 points per dollar on your spend if you have a card that rewards your bonus spend accordingly.
That will get you roughly 50,000 points. 50,000 points can at times get you a round trip flight to Europe in coach, which can be well over $1,000 and depending on your spend distribution can get you a one-way business class ticket which will run in the $2,000-$5,000 range.
Cash back will only get you $500 in this case. Still a very nice return, but nowhere near where you could be using a points-based credit card.
Why It Matters
Again, my job here is to maximize your spend and your quality of travel life. I know cash-back cards are easy and somewhat safe, but with just a little bit more work you can turn your spend into thousands of dollars and an absolutely stellar travel experience. You will be happy.