December 3rd, 2010

Cash, Points, or Miles: Which Rewards Credit Card is King?

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**Today’s guest post is contributed by Dough Roller**.

Whenever you’re presented with credit card offers, whether through the mail or online, there is always a selling point from the issuer. Some cards reward points for every purchase that can later be redeemed for merchandise while others can hook consumers via travel rewards and free flights around the world. However, there’s always been, and will always be only one type of credit card that outperforms all others, and that’s the cash back credit card.

Mechanics Behind Rewards Cards

The mathematics on why cash back credit cards are a better value for consumers is easy to understand. You see, credit card issuers offer rewards on credit cards by creating their own conversion rate. If you own a travel rewards credit card, you earn points for every dollar spent. That’s also true for other types of rewards credit cards. Then, after you’ve collected your points, it’s time to see what they’re worth.

After you browse your rewards opportunities, you’ll quickly see that tens of thousands of points don’t go as far as you would expect. The basic conversion rate if you would like to turn those points into cash is for every 100 points, you have $1 earned. Should you turn your points into merchandise, the conversion rate gets worse and before you know it, all that money you’ve spent on your credit card doesn’t bring in as much in rewards as you first thought. The BEST you can do is earn 1 cent for each point you’ve accumulated and even that is rare to find.

Why Cash Is Still King

But with a cash back credit card, that won’t happen. The cash you earn is usually no lower than 1% on all purchases, with an opportunity to earn 5% on rotating categories throughout the year and possibly more than 20% if you shop online through your credit card issuer’s website. If you so desire, that money can then be turned into merchandise and you won’t be limited to the rewards catalog of your issuer. The money can be spent anywhere, on anything.

In addition to the cash back offer you receive, most credit card issuers are now offering a $100 cash bonus, just for signing up. Last but not least, you’ll also find that many points and travel rewards credit cards carry annual fees, whereas not a single card classified as a “cash back” card will carry an annual fee.

So instead of signing up for that travel rewards credit card, flying across the world to earn points and then be restricted in how you use those points, why not sign up for a cash back credit card, earn more money than you ever would with any other type of credit card and then be allowed to spend it as you wish. Go ahead and do the math on how much you can save and I guarantee you’ll always save more with a card like the Chase Freedom Visa.

This of course is not to say that other types of credit cards cannot come in handy for certain situations. The Blue Sky Preferred from American Express offers $100 in travel allowances each year. There are certainly a lot of quality non-cash back credit cards in the world today but if you’re using anything ousther than a cash back credit card for all of your day-to-day purchases, you’re not as frugal a shopper as you should be.

This guest post comes from Michael, a contributing editor of the Dough Roller, a personal finance and investing blog, and Credit Card Offers IQ, a credit card review site.


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