Choosing between cash back vs. points and miles rewards depends on how you plan to use rewards and how much time you’re willing to spend finding the best value. Rewards programs differ in their redemption values and earning restrictions. We’ll tell you how to choose the right credit card for you or your business.
How to Compare Cash Back vs. Points Rewards
Making the most of credit card rewards doesn’t have to be hard if you follow some simple rules. First, you should calculate the redemption value of the card you’re interested in. Next, examine whether the card offers fixed rate or bonus category rewards. Finally, consider whether the card’s rewards will actually benefit you. If the card offers big rewards on travel, but you don’t fly often for business or pleasure, it’s time to look at another card.
Here are the three steps to compare cash back versus points rewards:
1. Calculate the Redemption Value to Maximize Credit Card Rewards
A credit card rewards program’s redemption value is a measure of its rewards in dollar terms, whether you’re using a card for personal use or business. The rate is often represented as a percentage, and it measures the dollar return for each dollar spent. Essentially, a card’s redemption value allows you to compare different rewards programs using a standard measurement.
How to Calculate the Value of Cash-Back Rewards
The redemption value on cash-back credit cards is fairly straightforward. If a credit card offers 2% cash back on all purchases, its redemption value is also 2% when redeemed for cash. This means that for each dollar spent on the card, the cardholder should expect to earn 2 cents.
Redeeming Cash-Back Rewards
Most cash-back rewards programs allow cardholders to redeem their cash back for statement credits or as cash deposited into a bank account. You may also be able to redeem cash-back rewards for gift cards or merchandise.
When redeeming for gift cards or merchandise, you may not receive the same redemption value as you would when redeeming for cash back. To find the exact redemption value, you’ll have to:
- Figure out how many reward dollars you need to redeem to purchase a gift card.
- Divide the value of the gift card by the number of reward dollars you need to purchase the card.
If you can redeem a $50 gift card for 25 reward dollars, you know that your redemption value is 2%.
How to Calculate the Value of Points Rewards
Points rewards programs are more complicated because your earning rate (how many points you earn on a given purchase) may be different than the redemption value (how many points you need to collect an award).
The example below shows how to evaluate cards with different earning rates:
- Awards 3x points per dollar spent on travel
- Values points at 1.5 cents apiece when redeemed for travel on the Chase travel portal
- Awards 2x points per dollar spent on travel
- Values points at 1 cent apiece when redeemed for travel
Note: The information related to the Chase Sapphire Reserve credit card has been collected by fitsmallbusiness.com and has not been reviewed or provided by the issuer of this card.
Redeeming Points or Miles Rewards
In both earning and redeeming, the Chase Sapphire Reserve has more value than the Capital One Venture. But that may not always be clear when you’re looking to redeem points, which most often are used for travel. To find the exact redemption value, you’ll have to:
- Figure out how many points or miles you need to redeem a certain award (like an airline ticket)
- Divide the price of the award by the number of points needed to get it
If you know a flight from Chicago to New York requires 40,000 points to book and that the average price of a plane ticket is ~$400, you’d be able to figure out the redemption value as follows:
- ($400 plane ticket) / (40,000 points) x (100) = 1%
The best way to use credit card points, particularly if you use a travel rewards credit card, may be to transfer your rewards points to partner airlines or hotels. You may be able to find redemption rates of ~2% or more. CreditDonkey, for example, found these deals when transferring Chase Ultimate Rewards points to:
- British Airways: Fly round-trip from Los Angeles to Honolulu for 25,000 British Airways Avios points on an award ticket that normally costs between $500 and $800. Points value = 2 cents to 3.2 cents each.
- United Airlines: Fly round-trip from Houston to Bali, Indonesia, for 80,000 MileagePlus miles on an award ticket that normally costs ~$1,500. Points value = ~1.9 cents each.
“Cards that earn points or miles can be trickier to understand, but when used strategically, can generally provide more rewards value per dollar spent than cards that provide cash back. Usually, these point-earning cards are travel-oriented, and either provide the highest rewards value when transferring points to a partner airline, or will earn more points on travel-related purchases. If you do a lot of business travel, you may be best off with one of these cards, but if travel is not a big part of your business, you’ll likely be better off with a card that earns cash back.”
— John Ganotis, founder of Credit Card Insider
You can increase your redemption value by using transfer partners, but you’ll need patience and a bit of knowledge about how frequent flyer programs and card partners work. Redeeming points through a card partner is best for cardholders who travel for pleasure and are flexible about where and when they travel.
2. Check Category Rewards, Rewards Caps, & Point Thresholds
It’s not enough to simply compare the redemption rates of two cards to find the true value of points versus cash-back rewards. You’ll also need to examine whether a card:
- Offers fixed-rate rewards on all spending or bonus rewards on certain categories like office supplies and travel
- Caps the maximum amount of rewards you can earn at a specific rate
- Offers rewards only if you meet certain spending thresholds
Fixed Rate vs. Bonus Category Rewards Programs
Fixed-rate credit cards offer the same reward for all spending. Both cash-back credit cards and points credit cards offer fixed-rate rewards. You’ll typically earn between 1% and 2% on all spending with a cash-back card, and between 1x points and 2x points with a points card.
Rewards credit cards that offer category bonuses pay a higher rate in some categories of spending than in others. You’ll typically earn between 2% and 5% in bonus categories with a cash-back card and between 2x and 5x with a points card. Non-category spending typically earns just 1% cash or 1x points.
Typical credit card bonus categories include:
Cards may offer category bonuses in multiple categories and at multiple earning rates. You may earn 5% cash back on office supply spending and 3% cash back on gasoline purchases on the same card.
Small business owners should pay close attention to whether a credit card imposes spending caps or point thresholds that could impact your rewards return.
Spending Caps Could Limit the Value of Small Business Rewards
Many cash back and points credit cards set spending caps on bonus category rewards. Once you spend between $25,000 and $50,000+ in a bonus category, your rewards may drop from as high as 5% to as little as 1%. Business owners, who tend to spend more than individual cardholders, need to consider how to maximize credit card rewards when looking for a new card.
The Chase Ink Business Cash℠, for example, offers the following cash-back rewards:
- 5% cash back on the first $25,000 spent in combined purchases at office supply stores and on Internet, cable, cellular phone, and landline services each account anniversary year (then 1%)
- 2% cash back on the first $25,000 spent in combined purchases at gas stations and restaurants each account anniversary year (then 1%)
- 1% cash back on all other purchases
The cap means you can only earn statement credits equal to $1,250 in one calendar year in this expense category before the rate drops to the 1% rate on everyday spending. If you expect to spend $25,000+ per year on office-related expenses, you’ll eventually stop receiving the 5% cash-back benefit.
Point Thresholds on Business Cards Could Hurt Rewards Value for Low Spenders
Found most frequently on small business fuel cards, point thresholds limit the value of rewards unless you meet certain spending requirements. You may have to purchase a certain number of gallons before you earn any rewards.
The 76 Universal Card, for example, offers the following monthly rebates when using the card at 76, Conoco, and Phillips 76 locations to purchase fuel:
- No per gallon rebate: 0 to 999 gallons
- 1 cent per gallon: 1,000 to 2,499 gallons
- 1.5 cents per gallon: 2,500 to 4,999 gallons
- 2 cents per gallon: 5,000 to 6,999 gallons
- 3 cents per gallon: 7,000 to 9,999 gallons
- 4 cents per gallon: 10,000+ gallons
If your business doesn’t budget for significant gas purchases, the value of a card with a rewards threshold significantly decreases. But even if your business spends heavily on gas, that doesn’t necessarily mean a card with a rewards threshold is right for you.
How to Decide Whether Reward Caps or Thresholds Are Right for Your Business
If your company has fuel spending in its budget, you’ll want to compare different types of cards to see if a card with a rewards cap or one with a spending threshold is right for you. You’ll make this comparison keeping your annual fuel spending budget in mind.
If your company purchases less than $25,000 worth of fuel annually, you’ll be better off with a small business credit card like Chase Ink Business Cash℠. If your company buys 5,000+ gallons a month, the 76 Universal Card is a better option. These two cards aren’t, of course, your only choices. Before deciding, look at all the best credit cards for fuel.
3. Consider the Rewards Based on Your Needs
Finally, when comparing different credit card rewards, make sure the rewards actually benefit you. If you travel frequently, a card that offers huge category bonuses on groceries will do you little good. Instead, consider a card like the American Express Business Platinum Card®, which pays:
- 5x points on flights and prepaid hotels booked through AmexTravel.com
- 1.5x points per dollar on purchases of $5,000 or more, up to 1 million additional points per year
- 1x points on all other spending
The points alone aren’t this card’s only value. It also offers major travel benefits, including:
- Free access to American Express’ network of Centurion lounges located in slightly less than one dozen U.S. airports
- Priority Pass Select membership, which gets you free access to more than 1,000 lounges worldwide for you and two guests
- Either a $100 statement credit for Global Access or $85 statement credit for TSA PreCheck once every four years
- A $200 annual statement credit toward air travel expenses like baggage fees and inflight food and drink
- Elite status at a number of car rental agencies
- 10 annual free Gogo inflight Wi-Fi passes
- 35% points rebate if you book a business or first-class flight, up to 500,000 bonus points per calendar year
Conversely, if you have diverse spending needs not covered by bonus categories—or you favor the simplicity of cash-back rewards—a card like the Citi Double Cash might be a better bet. It pays 2% cash back on all spending, whether you purchase a pen or a plane ticket.
How to Compare Cash Back vs. Points Rewards
Ask yourself this to quickly determine whether a cash back versus points card is right for you: How do I want to use my credit card rewards? In general, if you want to redeem your rewards for travel—and potentially find a higher redemption rate—points-based cards are the way to go. If you want cash—and want a guaranteed redemption rate—grab a cash-back card.
“Cash is good for any business and you can never go wrong with cash back. However, if you travel and are loyal to a travel brand, consider a co-branded airline card, hotel travel card, or fuel card. If you travel and typically pick the low-cost option, it might be best to use a general travel rewards card.”
— Gerri Detweiler, Head of Education for Nav
How to Maximize Credit Card Cash-Back Rewards
Credit card cash-back rewards are discounts or cash back earned on purchases made using the card. You may earn the same reward for all spending or bonuses for certain types of spending. You can maximize your cash-back rewards by redeeming your rewards as a statement credit or deposit into a bank account. You also may be able to redeem cash back for gift cards, travel, or merchandise, but the redemption values may not be as high.
Types of Credit Card Cash-Back Programs
Credit cards that pay cash-back rewards typically charge annual fees that range from $0 to $95. They return 1% to 2% on everyday expenses and up to 5% on specific spending categories.
There are two types of cash-back credit cards:
- Fixed rate: You’ll earn 1% to 2% on all spending regardless of the category.
- Category bonus: You’ll receive a bonus return of up to 5% on certain spending categories. The Chase Ink Business Cash℠ card, for example, pays its highest reward of 5% on purchases at office supply stores and on internet, cable, cellular phone, and landline services.
Who Cash-Back Credit Card Rewards Are Best For
People or businesses that want to use their rewards to pay off a portion of their credit card bill can benefit the most from using a cash-back credit card. Cardholders receive cash-back rewards in the form of a statement credit, which acts as a discount on your spending.
Earning cash back may be a more flexible benefit when compared to airline miles, which can only be redeemed for airline-related items such as tickets. If you don’t travel much, getting cash back in the form of a statement credit discount is a better option.
How to Maximize Credit Card Points Rewards
Some credit cards offer rewards in the form of points earned for each dollar spent. You may either earn fixed-rate rewards for all spending or enhanced rewards on certain category spending. In many instances, the best way to maximize points rewards is to redeem your points or miles for travel.
Types of Credit Card Points Programs
Credit cards that offer bonus category points charge annual fees that range from $0 to $450. They can return 1x to 2x points on everyday expenses and 5x points on certain spending categories.
There are two types of points rewards credit cards:
- Fixed rate: You’ll earn 1x to 2x points on all spending regardless of the category.
- Category bonus: You’ll receive a bonus return of up to 5x on certain spending categories. The American Express® Business Gold Card, for example, pays its highest reward of 4x points on select categories, up to $150,000 a year in purchases.
Points cards also are distinguished by the types of spending they reward most, including travel and purchases at specific types of retailers, like office supply stores or supermarkets.
The best credit cards typically fall into one of four categories:
- Airline and frequent flier credit cards: Lets cardholders earn “miles” on credit card purchases that can be redeemed for airline tickets. Cards can be either general or airline-specific. These types of cards often come with travel benefits, including free access to airport lounges.
- Hotel and general travel credit cards: Offers points for all credit card purchases, redeemable for free nights in a hotel or hotel upgrades. These cards will also often offer general perks that can be redeemed for points, such as theme park admission and airline travel. Rewards can be general purpose or hotel-specific.
- Retail rewards credit cards: Cards that are co-branded with a major retailer like Costco or Walmart. Cardholders can earn points on purchases made anywhere, which can be redeemed for products or services from that specific retailer. In-store purchases made with the card are typically awarded double or triple points.
- Gas and fleet cards: These cards offer points that can be used for gas rebates. Points are earned on purchases and are typically redeemed automatically for rebates at the pump. Some cards can only make fuel purchases, while others can make general purchases, too.
Who Points Credit Card Rewards Are Best For
Credit card rewards points offer a wide range of redemption options. Points cards typically offer the best rewards on purchases like airfare and gasoline.
Points-based cards are typically best for businesses or consumers who can use the points to redeem toward travel, as redemption values tend to be higher when used to book flights and hotels. Points-based rewards credit cards also frequently offer travel perks not found on cash-back credit cards, like free access to airport lounges and reimbursement for baggage fees.
Pros & Cons of Credit Card Cash Back vs. Points Rewards
There are many pros and cons of cash back and points rewards credit cards to consider. But if you’re primarily looking to put rewards back into your business or—for individuals—keep more money in your pocket, cash-back cards offer more flexibility because you can spend your rewards on anything.
|Cash Back Rewards Cards||Big introductory rewards may not carry an annual fee||You may receive few card benefits, like airport lounge access|
|Redemption options are generally straightforward||Rewards are not focused on travel|
|Points Rewards Cards||Redemption values may be higher, especially when redeemed for travel||Redemption isn’t automatic and finding the best value can be complicated|
|Travel benefits, like free baggage check, may be greater||Annual fees may be higher|
Cash-Back Rewards Pros
Cash-back credit cards are best for people who want to redeem rewards for statement credits or a deposit into a bank account. They offer flexibility because there are no restrictions on what you can use the rewards for, low annual fees, and the potential for big rewards.
Here are the biggest factors in favor of cash-back cards:
- Redemption flexibility: When getting cash back from a credit card, you can use those rewards in any way you see fit. This isn’t always the case with points rewards, which may require you to redeem for travel only.
- Lower annual fees: Some points rewards programs come with annual fees of as much as $450. Cash-back card annual fees generally are capped at $95, although there are a number of great options that charge no annual fee, like the Chase Freedom Unlimited® card.
- Big introductory rewards: The best introductory rewards used to be reserved for credit cards that offer points rewards, in part because those cards tended to have higher annual fees. No more. You can now find cash-back rewards credit cards that offer introductory rewards worth $500+, including the Chase Ink Business Cash℠ card.
Note: The information related to the Chase Freedom Unlimited credit card has been collected by fitsmallbusiness.com and has not been reviewed or provided by the issuer of this card.
Points Rewards Pros
Points rewards credit cards are best for people who can use the points to reduce the cost of travel. Points or miles cards may offer better benefits than cash-back cards. You also may be able to find higher redemption values for your points.
Here are the biggest factors in favor of points credit cards:
- Earn points your way: The credit cards include options to earn a high, flat-rate return on all spending up to 2x points or solid returns on bonus category spending, up to 5x points on purchases such as airfare and office supplies.
- Enjoy more benefits: Because many points cards are tied to travel, they often feature excellent perks like airport lounge access, reimbursement for expedited airport security screening programs, and annual travel credits worth $200+.
- Higher redemption values possible: Points- and miles-based rewards programs often allow users to redeem travel points directly from the issuer’s travel portal for ~1 cent per point. Redemption values can reach 3+ cents when transferring points to partner airlines and hotels.
Cash-Back Rewards Cons
If getting the most value out of rewards is your top goal, a cash-back credit card rewards program may not be for you. Cash-back cards may offer lower redemption rates than points or miles cards and come with fewer perks, like access to airport lounges.
Here are the biggest factors against cash-back credit cards:
- Lower redemption rates: Cash back is nearly always worth 1 cent per percentage point redeemed. Users have little opportunity to find more lucrative redemption options, unlike with a points card.
- Fewer perks: Because cash-back credit cards tend to carry lower annual fees, they typically come with fewer benefits than some points-based rewards cards offer. If you’re looking for airport lounge access, or even cell phone insurance, look elsewhere.
- Rewards not focused on travel: Cash-back cards may offer big rewards on restaurant and grocery spending, but they don’t tend to offer big rewards for travel expenses.
“Before a business (or consumer, for that matter) ever considers a rewards card, it is imperative to make sure they handle their finances in a very disciplined way. Rewards cards are only for people who pay off the balance on their account in full and on time each month. Otherwise, the interest payments from carrying a balance will cause that business some significant money problems. If you can’t be sure that you’ll pay off the balance in full and on time each month, then you’d be better off getting a card with the lowest APR (versus one with a higher APR and some rewards program).”
— Bill Hardekopf, CEO, LowCards.com
Points Rewards Cons
If you don’t travel much, a points-based rewards program may not be for you. Points or miles rewards cards tend to have higher annual fees, and redemption isn’t nearly as straightforward as with a cash-back card.
Here are the biggest factors against points credit cards:
- High annual fees: Although some cash-back credit cards charge annual fees of up to $95, a number of premium points-and-miles cards charge $200+ per year just to own the card.
- Redemption values vary: You can cash in your points for cash or merchandise, but points cards discourage this by degrading the redemption value when you don’t choose to use your points for travel. Some redemption options may fall below 1 cent per point.
- Redemption isn’t automatic: With some cash-back credit cards, the issuer will automatically award you either with a statement credit or a deposit into your account. Points redemption is manual. Some can be redeemed instantly, while others can take 10+ days to receive the award.
How to Account for Taxes on Cash-Back Rewards & Points
There’s good news about how to account for your points versus cash-back credit card rewards when it comes to taxes. You don’t need to report your rewards to the IRS if you received them by spending money using your card. In this case, the federal government treats your rewards as a nontaxable rebate.
This has been the IRS’ position since it issued a 2002 decision that airline frequent flyer miles aren’t taxable. That decision has largely been applied to credit card rewards, as well.
There is a distinction, however, between credit card rewards you receive for spending money and an offer that comes with no spending requirement. You may see business or personal bank accounts make introductory offers with no financial requirements.
In any case, you generally don’t need to worry unless your credit card company sends you a 1099 tax form with the dollar value that you’ll have to report as “other income” on your tax returns. Of course, it’s always best to speak with a tax professional prior to making any decisions.
Frequently Questions (FAQs) About Cash Back vs. Points Credit Cards
Consumers have many frequently asked questions (FAQs) about whether cash-back credit cards or points credit cards are the best. If you don’t see your question here, you can always ask it in the Fit Small Business Forum.
Here are some of the most frequently asked questions about cash back versus points credit cards:
What Is the Best Cash-Back Rewards Card?
The best cash-back rewards card is the card that returns the highest rewards based on your spending habits. You can find cash-back cards that offer 5% or more on categories like food and office supplies. Other cards offer fixed-rate cash back of up to 2% on all spending. Fixed-rate cash back cards tend to be more valuable to most people than bonus category rewards.
Are Points Worth More Than Cash-Back Credit Card Rewards?
They can be, but it depends on how you redeem them. Most points rewards are worth 1 cent each, or the equivalent of a 1% cash-back credit card. But some cards offer the ability to increase the redemption value to 1.25%+ when you redeem points for travel through the issuer’s travel website.
Which Type of Credit Card Charges a Higher Annual Fee?
Generally, points-based rewards credit cards tend to charge higher annual fees, especially if they offer travel benefits like free airport lounge access. Most credit cards with an annual fee charge $95 or less. But some premium points cards charge annual fees as high as $450+.
The battle of cash back versus points credit cards comes down to this: How do you want to manage and redeem your rewards? Cash-back programs are simpler and more flexible when it comes to redemption. Points rewards cards may offer higher redemption values, particularly if you redeem your points for travel.
If simple is your mantra when choosing the best credit card, check out the Chase Ink Business Cash℠ card. You can earn cash-back rewards up to 5%, get competitive rates, and get employee cards at no additional cost.