Key Takeaways
- Cash back is straightforward and flexible, while travel rewards can offer greater value for frequent travelers.
- Travel rewards cards may include perks like travel insurance, free hotel nights, and airport lounge access.
- Redemption options, point values, and ease of use vary widely.
- Annual fees, bonus categories, and transfer partners should factor into your decision.
- Choosing the right card depends on how often you travel, how you spend, and whether you pay off your balance each month.
Credit cards offer more than just convenience—many also provide the added benefits of cash back or travel rewards. These are bonuses cardholders may be eligible for simply by using their cards to pay for day-to-day transactions. However, it’s important to learn the differences between these rewards before applying for a new card to maximize benefits and minimize fees.
How Cash Back Credit Cards Work
The basic principle of cash back credit cards is that they provide a payment back to the cardholder based on the amount they spend using the card. Users earn a percentage back—known as the cash-back rate—either as a statement credit, a direct deposit to a separate account, or in the form of gift cards. Statement credits are common and involve a reduction of a credit card statement, made before the user pays their monthly bill, in the amount of the reward.
Cash back cards typically pay rewards at either a flat rate or on a tiered system:
Flat-rate: The rate varies by card provider and the card itself, but between 1% and 2% is common. Users will usually earn cash back for any purchase made with the credit card. While the flat rate may seem low, it can add up over time.
Example: Spending $1,000 per month on a card with a 2% cash-back rate would yield $20 per month, or $240 per year, back to the user.
Tiered: Also known as a bonus category card, tiered cards provide cash back, but the reward rate will be different based on the category of purchase.
Example: A card may provide a baseline reward of 1.5% on all purchases, but a higher 2.5% reward for purchases made at a particular store or company.
How Travel Rewards Credit Cards Work
Travel rewards credit cards also provide a benefit based on the amount of money the cardholder spends using the card. However, in this case, the reward comes in the form of points or miles that can be redeemed to cover travel-related expenses, and users may receive more points for travel-related purchases than other categories.
There are multiple types of travel rewards cards, usually delineated according to whether they focus on airline, hotel, or general travel rewards. Some of the most popular examples of travel rewards cards include Chase Sapphire, American Express Gold, and Hilton Honors.
Note
Depending upon the type of card, the perks may be linked to a particular company (such as a specific airline or hotel chain), or they may be available for more general use.
Points-based rewards programs provide points—based on the number of dollars spent on the card—which can then be redeemed for various benefits, including gift cards, cash back, or select travel-related purchases.
Miles-based programs are typically linked to airline loyalty programs and may come with rewards such as discounted flights, free checked bags, and upgrades.
Users may redeem their travel rewards through a dedicated portal such as Chase Travel. These portals allow cardholders to exchange points directly for flights, hotel stays, perks, and more, and they typically require a minimum point or miles threshold in order to begin the redemption process.
In some cases, points may be transferable, meaning they can be moved between the card’s portal and specific rewards programs associated with a particular hotel, airline, or other travel firm. These transfer partners may offer better deals than are available directly through the portal, but the transfer process can add complexity.
Tip
Airline rewards programs often limit travel options at popular times of year, known as blackout dates, so it pays to redeem early so you can avoid unanticipated conflicts.
Rewards Value and Flexibility
Cash back cards offer a predictable rate (whether fixed or tiered) and return cash to users, making it easy for cardholders to capitalize on the benefit without making plans in advance. A cash back rate of 1 to 2 cents per dollar can add up quickly, and consumers with a tendency to spend money in certain rewards categories can find specialized cards to help further increase this benefit.
On the other hand, travel rewards cards often see a wider variety in value (although it often corresponds to approximately 1 to 2 cents per dollar, as with cash back cards), depending on the redemption, the platform, and more.
Travel rewards cards are also much more likely to have restrictions surrounding the redemption process itself. Blackout dates prevent users from using points or miles to book hotel stays or flights in certain high-travel periods of the year, for example, and cardholders may have to rack up a significant number of points before being able to redeem them at all.
Finally, points and miles may expire after a specified period of time, putting users at risk of losing their benefits if they don’t plan adequately.
Fees and Perks
Cash back cards often have no annual fee or very low fees. Travel cards, by contrast, often have higher fees—some may range up to many hundreds of dollars per year.
However, travel cards often come with a range of other perks, including lounge access in airports, hotel upgrades, travel insurance, and even free membership in services like TSA PreCheck. Some travel cards may even waive or reduce foreign transaction fees and currency conversions, helping to reduce costs associated with international travel.
The perks of many of these cards are impressive, but it’s crucial that users read the fine print to understand all of the requirements, stipulations, and potential risks before signing up for a new card.
Warning
Keep in mind that some benefits—such as points and miles—may expire after a certain period, risking the loss of rewards that have accumulated.
Ease of Use and Ideal Users
Generally, cash back cards make an excellent choice for beginning credit card users, those operating on a budget or otherwise less likely to utilize a credit card frequently, and those who don’t do much traveling.
Travel cards can be well-suited to experienced travelers, those often spending substantial amounts of money in any of the popular bonus categories, or those who enjoy planning their redemptions carefully.
Which One Is Right for You?
To determine which type of card is right for you, consider your spending patterns, your travel frequency, and whether you might prefer simplicity in a card or the process of strategizing how to maximize benefits, although the latter may cause frustration.
A parent who wants cash back on groceries and gas, for example, may not be in a position to travel or spend much—in this case, a cash back card could be the best fit. A frequent flyer looking for free flights, on the other hand, may prefer a travel card focused on an airline with which they commonly fly. A young traveler seeking to optimize transferable points may want the versatility of a general travel rewards card.
Are Travel Rewards Harder To Use Than Cash Back?
Yes. Many cash back cards automatically return cash to users, while travel rewards generally have to be redeemed through a portal or transferred to a partner.
Do Travel Rewards Expire?
In many cases, rewards do expire, so it is essential to carefully read the fine print for any rewards card.
Are Cash-Back Rewards Taxable?
Often, the IRS views cash-back rewards as a rebate or discount, neither of which is taxable. However, in the case that the reward might be classified as income, it could be taxable.
The Bottom Line
Rewards-based credit cards are immensely popular, and for good reason: these programs reward users for simply spending money on their credit cards. However, the types of rewards—and the ease with which one can make use of their benefits—vary greatly. Cash back cards tend to be more straightforward but may also have more limited perks, while travel cards tailor more to high-frequency travelers and those with unique spending habits.
