Credit: Shutterstock photoReward points, miles, cash back. There are many different types of reward credit cards available consumers today, and the jargon surrounding them can make choosing one difficult. Keep in mind that selecting a card type is only half the battle. Once you settle on one, you should still search for a card that suits you. The benefit of choosing a type of card first, is that it narrows down the number of offers you have to look through to find the right one.
If you want the most flexibility with how you can redeem your rewards, you should look at cash back credit cards. Typically, points and miles lock you into getting your rewards through some partnered vendor or airline. If you don’t have any need for these types of services most of the time, you will have no use for all the rewards you earn. Getting cash deposited into your account, or a check mailed to you, on the other hand, will always be useful.
If you're looking for higher reward rates, point and mile-based credit cards should be considered. The best fixed-rate cash back credit cards will typically not provide rewards rates higher than 2%. Some best hotel or airline branded credit cards can give you as much as 2.4%-4.8% back in value on your purchases, thus blowing cash back out of the water.
Keep in mind there will always be exceptions to this rule. For example, if you don’t mind keeping track of rotating categories, and dealing with spending caps, some cash back credit cards can give you rewards rates as high as 5%. Also, there are plenty of point/mile credit cards that produce subpar average rewards. At the end of the day, you will always want to still consider each individual offer before applying to maximize your rewards.
If you are a frequent customer of one particular airline or hotel chain, consider a co-branded credit card. Though they tend to be the most restrictive of all reward credit cards, co-branded credit cards come with the most luxury perks. With cash back and general travel cards , the focus tends to be on earning value through spending. The best co-branded credit cards, however, will often come with certain benefits that you get just for being a cardholder. For example, this can include things such as automatic elite status, free checked baggage, late check-out, and priority boarding. If you value these types of perks, you should weigh them against the reduced flexibility. So long as you do business with that brand at least once per year, you should have enough room to consistently find use for the points and miles you earn.
Paying an annual fee isn’t always a bad thing . Because fees come with a negative connotation, many people will automatically disqualify cards that charge one. However, sometimes paying the fee can make financial sense. Usually, a card with a high annual fee will come with higher rewards rates than non-annual fee counterparts. If you spend enough money in a given year, even a marginal increase in rewards rate can make paying an annual fee worth it.
If you want to know whether a higher rewards rate is worth the fee, there is a simple math formula you can work through in order to see what the required spending per month would be. Take the difference in annual fee between two cards and divide it by the difference in rewards rate. The result will be the breakeven point for the card’s annual fee. For example, say Card A comes with 1.5% cash back on all purchases and no annual fee, while Card B gives users 2% back but costs $50 annually. If you spend $50 / 0.005 = $10,000 or more in a year, it makes sense to go with Card B, despite its fee.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
