Cash Back or Miles? Ask Yourself These Six Questions First

Cashing In, our weekly column that focuses on credit card rewards, is back! Cathleen McCarthy, a veteran journalist with years of experience writing about travel and personal finance, will be answering reader questions each week. Her first installment tackles one of the most common credit card rewards question: Cash back or miles?

Dear Cashing In,

I'm not real happy with my current rewards card -- APR and annual fee are just too high -- so I'm looking for a new one. Problem is, I can't decide between a miles card or a cash back card. I've got a miles card now, but I have to admit that the whole cash back thing is kind of appealing. I keep going back and forth. How do I decide? 

- Allison

Dear Allison,

Before you make this decision, you need to examine your own lifestyle and spending patterns. You have the perfect case study: your own airline miles card. How many miles have you accrued in the past year and how often did you use them? If you had used a cash-back card instead, how would your rewards have compared?

For most people, cash back is a more practical way to go, if you have to choose. Many people just don't travel enough to make miles a better currency. Cash rewards are very straightforward -- typically, 1% to 5% of your spending credited to your account -- while miles can be devalued or difficult to translate into flights. How many miles you can accrue depends mainly on the credit card rewards program, but collecting on miles rewards depends more on the airline. You need to look into both.

Taking advantage of mileage rewards is more complicated than cash back, but there are opportunities to translate miles into dollars that many people don't take advantage of. For example, when you shop online, do you start at the Web portal for your card's frequent flier program? Most major airlines now have at least 500 retailers represented. Click through to Best Buy or Barnes & Noble through the airline and you can earn more miles per dollar spent and save money on the purchases through special deals.

Some questions to ask yourself:

How often do you travel and what are your plans for traveling in the future? If you take one domestic flight a year and spend the rest of the time daydreaming about exotic travel, your miles rewards may be more psychological than real. On the other hand, if you travel often or have a big overseas trip coming up, you might be able to achieve elite status with your miles. In that case, the ticket itself combined with the added comfort and convenience when you fly in the future may well trump the cash back.

Whether you choose cash back or miles, is the annual fee and APR in line with the rewards you're receiving? Smart of you to make that your first priority because those are the ongoing costs. Just make sure you're not trading $50 in annual fees for a benefit worth twice that (to you). For example, some mileage cards offer to waive check-in baggage fees as a sign-up incentive. Saving that $35/bag each way on one round-trip flight may cover the annual fee.

How much balance do you carry? Cash-back cards tend to have a higher APR and require excellent credit. If you don't pay off your bill every month, you should be going for minimal APR. The interest you pay can easily outweigh the rebates.

How many miles have you accrued? If you're this close to scoring that round-trip flight to Europe, it might be worth snagging before you switch. That alone could save you $1,000.

How much do you spend on your card? Do you spend enough to justify, say, a $65 annual fee for a preferred debit card that earns one mile per dollar, instead of one mile per two dollars? If so, the miles earned may prove more valuable than the 2% cash back on a no-fee card. Higher annual fees generally mean better potential rewards, but only if you spend enough to score them.

Here's the big question: What's more important in your life right now: cash flow or travel? If you're on the road a lot, miles/points may allow you to experience travel at levels you would never pay for out of pocket. But if you're starting a family or saving for a home, maximizing travel rewards may not be your top priority.

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