Cash back or points?

Award travel: booking flights, hotels, or vacations with points and miles | Rewards currency: the cash back, miles, or points earned from spending

Membership Rewards (MR) points: American Express' rewards currency | Ultimate Rewards (UR) points: Chase's rewards currency | ThankYou Points: Citi's rewards currency

There are two major ways to be rewarded for your spending: earning a percentage of your purchases via cash back (e.g., spend $100 in a category that earns 3% back to earn $3) or via points (e.g., spend $100 in a 3X points category to earn 300 points). For comparative purposes, it is easiest to think about the conversion ratio of $1 in cash back=100 points. Many credit card companies, like Chase for example, follow this math when redeeming points. If you were to use 5000 Ultimate Rewards (UR) points for a statement credit, you would see $50 deducted from your balance. (While Chase cards are often marketed as cash back cards, they technically earn Ultimate Rewards points, but these can be redeemed for cash back at the $1:100 points conversion rate above). You could also transfer those 5000 points to travel partners and likely get more value than $50.

Other companies, like American Express, have more separation between cash back and points. Their cashback cards, like the Blue Cash Everyday, are strictly cash back, earning Reward Dollars that can be used as a statement credit or toward gift cards. Their points-earning cards don't earn reward dollars, but rather Membership Rewards (MR) points that can be transferred to airlines or hotels for outsized value for travel. These points can be used for a statement credit or for things like gift cards, but this is a terrible value. For most MR-earning cards, the ratio for statement credits is 0.6, meaning 10,000 MR points would be only $60 'Cash Back' as a statement credit. As a general rule, people planning to redeem credit card points or miles for statement credits should opt for strictly cash back cards instead.

Why would anyone choose to earn points?

Assuming the $1:100 points conversion above, it may seem confusing why someone would choose to earn points or miles rather than cash back. With American Express, for example, the conversion rate can be even worse if you were to redeem their points for cash back. The answer lies in the flexibility of credit card points or miles, and in their outsized value when transferred to airlines or hotels. It is possible for 100 points to be worth closer to $5 or $6 (or more) when redeemed for flights or hotel stays.

| Flexibility |

The 'Big 4' (Chase, American Express, Capital One, and Citi) all have their own transferable rewards currencies. Each company works with different airlines and hotel brands that allow their points to be converted to the rewards currency of another program. For example, American Express is one of many credit card companies that partners with Air Canada's Aeroplan program. I can convert 10,000 MR points into 10,000 Aeroplan points, which can be used for flights on Air Canada and their partner airlines. During a transfer bonus, I would get even more value. Right now, for example, there is a 30% transfer bonus when converting MR points into Avios, the rewards currency of Aer Lingus, British Airways, and Iberia airlines. That means 10,000 MR points could be converted into 13,000 Avios, which can be used to book flights with those airlines and their partners. The ability to convert your credit card points into the rewards of dozens of different airlines and hotel brands is a major reason why they're so valuable. Because of airline alliances, my Aeroplan points can be used to book with several airlines, like Singapore Airlines, United Airlines, and more. Of course, the most flexible reward is and will always be cash. You don't need to worry about transfer partners, points ratios, devaluation of points over time, or whether or not you should book a vacation with case or with your points/miles. If you never travel, it's hard to make the argument that chasing points or miles makes the most sense for you. However, a carefully planned trip once a year or every other year can make earning points worth it.

| Outsized Value |

The best argument for choosing a points/miles card setup is because, when used right, they are way more valuable than cash. I've written before about how I used 63,000 points to book a $4000+ business class flight from Atlanta to Istanbul. When considering the baseline conversion ratio of $1:100 points, you should see how valuable points were in this scenario. 63,000 points should be valued at a baseline of $630, but in my case, 63,000 points was worth over $4000. Those without any aspirations to fly business class still benefit here, as the cash price for a nonstop flight like this in economy class is usually at least $700. That means it can be 'cheaper' to fly business class with points than it is to fly economy class for cash. Additionally, in my example, the economy class ticket was closer to 47,000 points (conversion=$470), so it would be even less expensive had I selected economy class.

There are several important caveats for earning points and miles. Despite award travel being more accessible than ever, it is still way more complex than booking flights or hotels with cash. To do it successfully, you'll need to commit some time to learning the process. This means learning which credit cards earn points, where their points can be transferred to, whether or not your route can be booked with points, how to book with an airline's partner (e.g., booking a Japan Airlines flight with American Airlines miles), and more. Fortunately, there are incredible resources out there to assist in this process, but it will require time. There is no avoiding that. If you don't want to learn the process, I'd recommend a cashback setup.

Who would benefit from cashback cards:

• Those who want a simple setup

• Those without the time or energy to learn about how to transfer points and miles

• Those who don't travel

• Those who like to use rewards quickly rather than accumulating them for a big redemption

• Those who like the flexibility of cash, especially if you can earn interest with a High Yield Savings Account or grow your assets with stocks and bonds

Who would benefit from points/miles cards:

• Those who like to maximize their credit card rewards

• Those interested in learning how points and miles work

• Those who love to travel, especially luxury travel

• Those who like to earn particularly high sign up bonuses on credit cards (points-earning cards often have the highest bonuses)

As always, if you're interested in a new card, or want help planning a big trip, reach out for assistance.