Author: John S. Gibboney, CPA
June 14, 2017
The perks associated with credit cards can be confusing, and leave many people wondering what is the best choice? That’s a difficult question to answer because what might be best for one person, might be undesirable for you. When looking for a credit card, there seem to be endless choices of rewards cards, but we will break them down into two categories: points & cash-back.
To make it as simple as possible, cash-back means you either get a check or a statement credit when you redeem them, and points can be redeemed for services, merchandise, or most commonly, airline miles.
First, let’s talk about points. While they may be referred to as miles, remember that they are not equivalent to actual geographic miles. It’s just a catchy way of saying points. In the realm of points-earning cards, there are constant promotions and various ways to earn bonus points. You have probably received many different offers for thousands of bonus points if you sign up for a new card. While we all regularly throw these away as junk mail, on the occasion when you have decided to open a new card account, be sure to take advantage of the promotional bonus points.
Reasons to use a points or airline miles card are:
- Travel – If your main goal is travel, these points are the best way to do it. While cash back is great and can be used to fund a trip, you will never redeem enough cash back to pay for first-class tickets on an international flight. However, the right strategy of accumulating airline miles can achieve this goal.
- You already have good credit - The best way to stock up on these points or miles is to have several cards or spend lots of money on one specific card. If you don’t have excellent credit or don’t pay off the monthly balance, it can do harm to your credit score.
- You’re organized – It can be complicated to keep up with what categories earn you the most points and when you can use them. If you use multiple cards, it takes skill to strategize and remember when and where to use each card to maximize the rewards. There may be price comparison or specific timing required to optimize your value. If you are good at this type of thing, you can really save on some big-ticket items or flights.
Now let’s look at the perks of cash-back rewards.
When in doubt, take the cash. This is simplest and often makes the most sense. You can redeem the value you build up from making credit card purchases directly for a dollar amount. There is no guessing at value or comparing prices. You get money in the bank or get to cut a smaller check to the credit card company. A standard rate to expect is 1% cash back on purchases, but there are some cards with a higher rate, as well as bonus points that can generate more cash back in certain purchase categories. Good examples of this are cards that give higher percentages for gas or grocery purchases, so look for cards that are linked to locations you regularly use.
Reasons to use a cash-back rewards card are:
- Simplicity – You don’t have to worry about complicated airline miles redemptions and restrictions. You know how much money you are getting back.
- Reduced temptation – Racking up airline miles feels great, but there is an incentive to either spend money you shouldn’t in order to get more points, or to take a trip that is out of your budget. After all, you don’t want to waste those points you earned. You may end up spending much more money than you saved in this scenario. With cash back, there is less temptation to spend money in hopes for an enticing reward.
Not only are people looking at advantages of credit cards, they also look for the fine details such as interest rates and fees. Interest rates can be a major factor when choosing any card. This article is written assuming you are not carrying a balance subject to interest charges. Rewards cards often have higher interest rates than non-rewards cards. However, paying the entire balance each month eliminates interest entirely. If you do carry a balance, the higher it is, the more you should focus on interest rate instead of rewards.
Whichever card or a combination of cards you decide is best for you, keep in mind the limitations of each. If there is an annual fee, you need to be sure that the rewards you can redeem are enough to offset the fee. Never spend more than you otherwise would just to get more points or cash back. This is like giving someone a dollar just to get a penny in return. And the reward value will almost never exceed the expense of credit card interest, so if at all possible, never carry a balance.
So what is the best choice? The best option can only be found by looking at your specific personal and financial situation based on needs, habits, and credit history.
John has been with our firm assisting clients with his tax and accounting knowledge since 2010. He works diligently with our clients to help them make the right decisions regarding their taxes and finances.