Travel points vs. cash back: Choose the best rewards credit card for you

by Bridget Casey July 17, 2020 / No Comments

When it comes to choosing a credit card, the way to get the most bang for your buck is to pick the one that’ll give you the most rewards for your spending. A cash back or a travel rewards credit card is the easiest way to use everyday purchases to give your budget a boost.

Credit card points vs cash back – the basics

Travel credit cards let you earn points for every dollar spent, which can be redeemed for travel-related purchases later (such as flight tickets, hotel stays, car rentals, and more). You can often redeem your points flexibly on any airline, but sometimes, your travel has to be booked directly through the reward program’s official website or only from participating airlines or hotel chains. The best travel credit cards also offer other travel-related perks, such as travel medical insurance, trip cancellation, and coverage for lost baggage.

Cash-back credit cards give a percentage of your spending back to you as a reward. You can typically choose to have the cash back credited directly to your credit card statement or deposited into your bank account. Some cards pay out monthly, others annually, or when you hit a certain threshold of cash back earned. The best cash-back credit cards often provide other perks such as extended warranties or purchase assurance.

Credit card points vs cash back – how to decide

If you’re struggling to decide on which type of credit card rewards you want to rack up – points or cash back – here are some important factors to consider that can help steer you in the right direction.

1. Credit card benefits and side perks

While some credit card benefits (such as price protection and extended warranty) can be found on both cash back and travel credit cards, others are more exclusive to the latter.

Everything from access to airport lounges and discounted vacation packages to free checked-in baggage (among a handful of other benefits) are more commonly found on travel credit cards. When it comes to credit card travel insurance, coverage periods and amounts also tend to be higher on travel credit cards compared to their cash-back alternatives.

2. How often you travel

If most of your vacations are staycations and you travel abroad less than once every two years on average, a cash-back credit card may be more up your alley.

Travel credit card points are primarily oriented towards airline ticket redemptions, which may not appeal to someone who isn’t a frequent flyer or an aspiring traveller. Most travel cards also offer bonus points on travel-related purchases, so if you seldom spend on flight tickets or hotels, you may not rack up as many points and could end up with a credit card that isn’t aligned with your spending habits.

While it’s true some travel credit cards allow you to redeem points for merchandise or gift cards in addition to flight tickets and hotel stays, you’re often limited to a catalogue of products. Not to mention, you tend to reap less value out of credit card points for merchandise redemptions, gift cards, or statement credits than flight tickets.

3. Bonus categories and net rewards

Bonus categories are types of purchases that earn you a higher amount of rewards for every dollar you spend. For example, if a credit card offers 4% cash back on groceries and 1% back on all other purchases, groceries is considered a bonus category.

Aside from a few exceptions, the majority of cash-back credit cards offer the same limited selection of bonus categories (namely gas, groceries and recurring bills payments. Travel credit cards in comparison have a far larger selection of bonus categories, significantly increasing the potential value you can earn from them.

Depending on the travel card, you can earn bonus points on everything from restaurants, food deliveries, groceries, airline tickets, hotel bookings, gas, public transit, taxis and more. That means you’ll often walk away with more rewards with a travel credit card, as you’ll have more opportunities to earn multiple points on every dollar you spend.

4. Ease of use and flexibility

The rewards offered by a cash-back credit card are easy to understand (after all, it’s straightforward cash). Rewards are also flexible and can help you save on all your everyday expenses instead of just flight tickets, hotel stays, or merchandise from a pre-chosen catalogue of products. The redemption process for cash back cards is simple too. At the minimum, the cash back you earn will automatically be deducted from your balance once every calendar year, while in some cases (like with the BMO CashBack Mastercard or TD CashBack Visa Infinite), you can redeem your cash back at any time.

On the other hand, travel credit card points programs require some extra effort to understand and are usually accompanied by terms and conditions that can impact the value of your points based on when and how you redeem them. It’s worth noting though, every program is unique and some are a lot simpler than others. For instance, TD Rewards, Scotia Rewards, MBNA Rewards, and AMEX Membership Rewards all offer relatively simple redemption processes with straight-forward points values.

5. Rewards values

Here’s where things get interesting.

When it comes to cash back credit cards, rewards values are pretty straightforward as covered above. You’re dealing with cash so 1% will always equal 1 cent, 2% will be 2 cents, and so on.

While travel points cards can be a bit more complicated, points can potentially offer a ton more value than cash back depending on how you redeem them and the rewards program in question.

For instance, if you book a vacation with AMEX Membership points, you could settle for 1 point being worth 1 cent. But, if you were to transfer over your AMEX points to another rewards program (like, say Aeroplan), or strategically take advantage of the AMEX Fixed Points Program, the value of your points could go from 1 cent to upwards of 2 cents each. That’s a doubling in value. The same logic applies to programs like Aeroplan, where if you book a trip with the goal of maximizing your miles in mind, you could exploit the program’s stop-over policy to visit more destinations without owing extra in airfare. Every rewards program is different though, so maximizing points values does require some research and know-how. And with some programs like Scotia Rewards, where 1 point is always equal to 1 cent when redeemed for travel, the ability to maximize isn’t always there.

You’ll also want to consider the fact that travel points only offer the best value when actually redeemed for travel rewards like flights or hotel stays. By using points for anything else, like cash statements or gift cards, you’re making a compromise and reaping far less value out of each point. If you’re not a traveller, again, stick with cash back.

6. Annual fees

Annual fees for cash-back credit cards peak at the $120 mark, with plenty of cash-back card options with fees of between $0 and $60.

While there is a selection of no fee travel credit cards, many of the best travel credit cards in Canada have annual fees that range between $120 and $150. Some ultra-premium travel cards even have annual fees that climb to upwards of $500.

7. Welcome bonuses

The ability to gradually earn rewards on your everyday spending is one thing, but in the case of many travel credit cards, you can quickly amass a ton of free points by taking advantage of lucrative sign-up bonuses.

For example, the American Express Cobalt, one of Canada’s best travel credit cards, is currently offering 2,500 free points ($25 value) every month you spend at least $500 on the card. That potentially adds up to $300. The BMO World Elite Mastercard has a welcome offer of 40,000 free bonus points ($280) when you spend $3,000 on the card in the first 3 months and keep your account open for at least one year.

In comparison, bonus offers on cash back credit cards usually max out at around the $200 mark.

8. Interest rates

When it comes to interest rates, there’s very little to differentiate cash back from travel credit cards. As long as you pay off your balance in full and on time every month, you won’t owe anything extra on either card type. But if you do carry a balance, interest will kick in (usually at an annual rate of 19.99%) and take a big bite out of your rewards.

If you tend not to pay off your balance in fully every month, consider ditching rewards cards altogether and sticking with a low interest credit card.

Top cash-back credit cards

The no-fee Tangerine Money-Back Credit Card offers 2% cash back in up to three spending categories of your choice, and 0.5% cash back on all your other purchases. There are 10 categories to choose from: groceries, gas, drugstore, furniture, hotels and motels, home improvement, parking, recurring bills, and restaurants. You’ll receive your cash-back reward monthly, as a statement credit or deposit to your bank account. Best of all, there’s no limit to the amount of cash back you can earn, so make sure to use this card for big and small purchases.

Tangerine Money-Back Credit Card

  • No annual fee
  • Earn 2% cash back on purchases in two categories of your choice, and 0.5% cash back on everything else
  • Get a third category earning 2% cash back when you deposit your rewards into a Tangerine Savings Account
  • No limit on how much cash back you can earn

With the TD CashBack Visa Infinite, you’ll earn 3% cash back on groceries, gas, and public transit, and 1% on everything else.

TD CashBack Visa Infinite

  • Annual fee: $120 (rebated for first year)
  • Welcome Offer: Earn 6% cash back on eligible purchases for first 3 months (on up to $2,000 in spending). Expires August 16, 2021
  • Once offer ends, get 3% cash back on gas, groceries and recurring bills
  • Earn 1% cash back on all other purchases
  • Complimentary roadside assistance and travel insurance benefits
  • This offer is not available for residents of Quebec. For Quebec residents, please clickhere

Top travel points credit cards

A travel rewards credit card is the best card for you if you have wanderlust to satisfy and you want to make it affordable.

The American Express Cobalt Card lets you earn five points per dollar from all your food purchases (including both restaurants and groceries), 2 points on travel purchases (ranging from flight tickets to taxis), and 1 point per dollar on everything else. There is no limit to the number of points you can earn in a year, and your points never expire. Furthermore, you can redeem points retroactively, meaning if you’ve already spent on travel, you can go back and credit the purchase with points.

American Express Cobalt Card

  • Annual fee: $120 (charged at $10 monthly)
  • Earn 2 points per dollar on gas, taxis, public transportation and travel (air, water, rail, or road transport, plus hotels)
  • Earn 5 points per dollar on restaurants, coffee shops, bars, grocery stores, and food delivery
  • Welcome Offer: 2,500 points every month you spend $500 in your 1st year (total value of $300)
  • Earn 1 point per dollar on all other purchases

With the MBNA Rewards Platinum Plus, you’ll earn up to two times the points in three categories while owing no annual fee, and one point per dollar spent on everything else. Each point is worth $0.01 (which equates to a 1% return) when redeeming for travel expenses. Don’t have enough points to cover the cost of your flight or hotel? No problem, you can use what points you have and charge the difference to your credit card.

MBNA Rewards Platinum Plus

  • No annual fee
  • Earn 2 points per $1 on gas, groceries and restaurant purchases ($5,000 annual cap on each category)
  • For the first 90 days, earn 4 points per $1 spent on the three bonus categories mentioned above
  • Earn 1 point per $1 spent on all other purchases
  • Welcome offer: Get up to 10,000 bonus points
  • Income required: No specific amount

When it comes to choosing a cash back or travel rewards credit card, pick the one that offers the best return on your purchases and the best rewards for your lifestyle. Still undecided? You can always get one of each.

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