The Ultimate Reason to Ditch Your Cash Back Card for One That Earns Points
KEY POINTS
- Cash back credit cards are America's favorite card, but some rewards cards may have more earning potential.
- Points or miles beat cash back when you're capable of redeeming them for the utmost value.
- On the other hand, cash back cards are straightforward and don't require navigating the complex valuation systems on rewards cards.
Cash back credit cards are America's favorite type of credit card. Around 56% of Americans prefer them to other types, according to credit card research by The Motley Fool Ascent. I can testify to their popularity -- of the seven credit cards I own, five of them earn cash back.
And yet, as much as I love cash back credit cards, I also know they're not always the best for maximizing rewards. While cash back cards are easier to use, cards that earn points or miles have more rewards potential. If you've never had a rewards credit card that earns points, here's one reason you might want to ditch your cash back card for one today.
Cash back is fixed but point valuations depend on how you redeem them
Let's get to the point (no pun intended): Points often beat cash back because you can redeem them for higher valuations. To understand what that means, let's recall how rewards credit cards work.
Like cash back cards, rewards cards return a percentage of your spending back to you. But instead of giving you cash, these cards give you points or miles. The ratio of points to dollars depends on the credit card, but it will generally be higher when you redeem them for specific things, like travel.
For example, let's look at a popular rewards credit card -- the American Express® Gold Card. This card earns 4X Membership Rewards® Points per $1 at restaurants worldwide (plus takeout and delivery in the U.S.), 4X Points at U.S. supermarkets (on the first $25,000 each calendar year, then 1 Point), and 3X Points on flights booked directly with airlines or through amextravel.com (terms apply).
Good/Excellent (670-850)
Intro APR
Purchases: n/a
Balance Transfers: n/a
APR
See Pay Over Time APR
Rewards Earn 4X Membership Rewards® Points at Restaurants, plus takeout and delivery in the U.S. (on up to $50,000 per calendar year in purchases), and earn 4X Membership Rewards® points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X). Earn 3X Membership Rewards® points on flights booked directly with airlines or on amextravel.com.
1X-4X Membership Rewards® Points
Annual Fee
$325
Welcome Offer Earn 60,000 Membership Rewards® Points after you spend $6,000 on eligible purchases on your new Card in your first 6 months of Card Membership. Plus, receive 20% back in statement credits on eligible purchases made at restaurants worldwide within the first 6 months of Card Membership, up to $100 back. Limited time offer. Offer ends 11/6/24.
60,000 points + earn up to $100 back
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This card offers considerable value, as it earns 4X points at U.S. supermarkets (on up to $25,000 per calendar year in purchases, then 1X) and 4X points at restaurants. Plus, earn 3X points on flights booked directly with airlines or on American Express Travel. Meanwhile, over $600 in various spend credits can potentially offset the entire $325 annual fee. (Terms apply.) Overall, it’s an incredibly lucrative card for those who spend a lot in its bonus categories and can use its spend credits.
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- Impressive welcome offer
- Restaurant rewards
- U.S. supermarket rewards
- Travel and dining credits
- High-value rewards points
- Annual fee
- Inflexible spending credits
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- Earn 60,000 Membership Rewards® Points after you spend $6,000 on eligible purchases on your new Card in your first 6 months of Card Membership. Plus, receive 20% back in statement credits on eligible purchases made at restaurants worldwide within the first 6 months of Card Membership, up to $100 back. Limited time offer. Offer ends 11/6/24.
- Get the American Express® Gold Card in either the Gold, Rose Gold or Limited-Edition White Gold metal design. White Gold design is only available while supplies last.
- Earn 4X Membership Rewards® points per dollar spent on purchases at restaurants worldwide, on up to $50,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 4X Membership Rewards® points per dollar spent at US supermarkets, on up to $25,000 in purchases per calendar year, then 1X points for the rest of the year.
- Earn 3X Membership Rewards® points per dollar spent on flights booked directly with airlines or on AmexTravel.com.
- Earn 2X Membership Rewards® points per dollar spent on prepaid hotels and other eligible purchases booked on AmexTravel.com.
- Earn 1X Membership Rewards® point per dollar spent on all other eligible purchases.
- $120 Uber Cash on Gold: Add your Gold Card to your Uber account and each month automatically get $10 in Uber Cash for Uber Eats orders or Uber rides in the U.S., totaling up to $120 per year.
- $84 Dunkin' Credit: With the $84 Dunkin' Credit, you can earn up to $7 in monthly statement credits after you enroll and pay with the American Express® Gold Card at Dunkin' locations.
- $100 Resy Credit: Get up to $100 in statement credits each calendar year after you pay with the American Express® Gold Card to dine at U.S. Resy restaurants or make other eligible Resy purchases. That's up to $50 in statement credits semi-annually. Enrollment required.
- $120 Dining Credit: Satisfy your cravings, sweet or savory, with the $120 Dining Credit. Earn up to $10 in statement credits monthly when you pay with the American Express® Gold Card at Grubhub, The Cheesecake Factory, Goldbelly, Wine.com, and Five Guys. Enrollment required.
- Explore over 1,000 upscale hotels worldwide with The Hotel Collection and receive a $100 credit towards eligible charges with every booking of two nights or more through AmexTravel.com. Eligible charges vary by property.
- No Foreign Transaction Fees.
- Annual Fee is $325.
- Terms Apply.
Let's say you spend $10,000 on dining and U.S. supermarket purchases in a single calendar year. This would earn you 40,000 Membership Rewards Points. Since Amex points can be worth anything from $0.005 to $0.03 per point, you could potentially get $200 to $1,200 of value depending on how you redeem them. Terms apply, see rates and fees.
Let's say you're comparing this card to the Capital One Savor Cash Rewards Credit Card. This cash back card earns an unlimited 4% cash back on dining, entertainment, and for popular streaming services, and 3% cash back at grocery stores.
On the one hand, the two cards have comparable earn rates for dining out and select streaming services: 4X points versus 4% cash back. But whereas the Capital One Savor Cash Rewards Credit Card would give you a flat 4% back on this spending, the Amex Gold Card gives you the opportunity to flip those points into a higher value. For example, if you managed to get $0.0125 per point, the Amex Gold Card's effective rate would translate into 5% back per dollar. Terms apply.
This variable valuation system is how rewards credit cards can outperform cash back cards, even when both have similar earning rates. While 4 points could be equal to 4% back (if the redemption value is $0.01 for every point), they can sometimes be worth more when redeemed in a different way. Understanding how a rewards credit card works, then, can go a long way in helping you squeeze out the most value.
Points have more potential, but can be complicated to use in the most effective way
Most people can do the math above and agree there's more potential in earning points than cash back. And yet not everyone is going to ditch their cash back credit card for one that earns points. Why? Because rewards credit cards can be complicated.
It's true. Even in doing the math above, we had to make some major assumptions, such as getting more than the average value of $0.01 per point. This takes time, knowledge, and research to get right every time you redeem your points. Likewise, you may be limited in how you redeem your points, as only a handful of options will likely give you the best value.
On the other hand, cash back credit cards are fairly straightforward. Your card has an earn rate (or multiple earn rates), which determines how much cash back you'll earn for each purchase. If your card earns 3% back on a $100 grocery bill, you get $3 in cash back. You can then redeem your cash back for statement credits, deposits into your checking account, gift cards, or other cash-related choices. No points, no miles, and no complicated valuation systems to navigate.
This simplicity, coupled with the generous earn rates on the best cash back credit cards, are why these cards are America's favorite. While that doesn't make them better than rewards cards for everyone, it does make them more accessible.
All things considered, the best choice depends on how much effort you're willing to put into maximizing your rewards. If you prefer convenience, go with the cash back card. But, if you're ready to upgrade your credit card game -- and get more luxurious things like first-class tickets to Europe -- it might be time to try your hand at a points-based rewards credit card.
Our Research Expert
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent, a Motley Fool service, does not cover all offers on the market. The Ascent has a dedicated team of editors and analysts focused on personal finance, and they follow the same set of publishing standards and editorial integrity while maintaining professional separation from the analysts and editors on other Motley Fool brands.
For rates and fees for the American Express® Gold Card, click here
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