Credit card cash back vs. points: Which is better?

The choice between a cash back or points-based credit card should be based on your own specific needs. (iStock)

Credit card rewards can help you get extra value out of the purchases you’re already making. However, before you can start redeeming those perks, you need to make a decision: Do you want a cash back card or a points-based one?

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While there’s no one, single answer to the question of which credit card has the best rewards, one type of card may be a better fit for you. To help make your decision easier, we’ve laid out the pros and cons of each one below.

What is cash back on a credit card?

With credit card cash back, you essentially earn a rebate on your purchase, usually around 1-2 percent. Some issuers allow you to earn cash back at a flat rate across all your purchases while others will offer tiered rewards in certain spending categories. When tiered rewards are offered, they’re typically in everyday spending categories like gas, groceries, and dining.

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When it’s time to redeem your rewards, most issuers allow you to cash in your rewards in the form of a credit statement. Some may also offer you the option to deposit the funds into a bank account or receive a check in the mail. Whichever method you choose, though, the result is the same: it’s money put back in your pocket.

How do credit card reward points work?

With credit card points, on the other hand, you’re given a certain amount of points for every dollar you spend. Those points can then be redeemed for other purchases through the issuer’s rewards program. Typically, points can be put towards travel purchases or towards purchasing products such as gift cards.

The one big difference with points-based cards: there’s no consistent redemption value across the board. With a cash back card, you always know the value of your rewards. However, the value of a point can vary widely, depending on how it gets redeemed.

Pros and cons of cash back cards 

Pros

  • They’re simpler. If you’re looking for a straightforward rewards program, it doesn’t get much easier than cash back. Some issuers even let you automatically redeem your rewards once you hit certain earning milestones.
  • They rarely have annual fees. While annual fees are common with points cards, few cash back cards have them.

Cons

  • Sign-up bonuses are usually modest. Since these cards don’t charge you any fees, their welcome bonuses tend to be smaller than what you might see offered by other credit cards.
  • They tend to lack extra perks. Cash back cards usually don’t offer many rewards besides the potential to get a rebate on your purchases.

Pros and cons of points cards

Pros

  • Sign-up bonuses are usually more generous. If you’re looking for a sizable welcome bonus, the best credit cards for travel often offer hundreds of dollars worth of rewards, particularly if you meet an initial spending requirement.
  • They often come with travel benefits. Many points cards also offer membership perks like airport lounge access or no foreign transaction fees.

Cons

  • Annual fees can add up and become costly, sometimes tallying hundreds of dollars per year.
  • The value of your points varies. The way in which you can redeem them also varies by issuer, so you’ll have to do a little more legwork to learn how to get the greatest value from your points.

Which type of card is right for you?

“When you’re deciding between a cash back or points card, you want to look at your goals for the rewards,” advises Molly Ford-Coates, the founder and CEO of Ford Financial Management in El Paso, Texas. “Are you at a point in life where you could use a bit more cash? Or are you looking to do more traveling?”

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Ultimately, if you don’t travel very often and don’t want to have to think about how to get the most value from your card, you’ll probably be better served with a cash back option. However, if you plan on traveling at least once or twice a year and don’t mind doing some homework to learn how to use the issuer’s rewards program, a points-based card might be right for you.