Points, Miles, or Cash: Which Credit Card Rewards Are Best for Me?

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Everybody likes free stuff. No wonder credit card rewards programs are so popular.

Of course, credit card rewards may not exactly be free. You have to buy things to rack up rewards. You may have to pay a fee for the use of your card, and if you carry a balance on that card you might also pay extra interest in a rewards program.

So are these programs worth it - and is it better to get your rewards in the form of points, travel miles, or cash back? It all comes down to costs versus benefits, with the costs and the benefits depending both on the terms of the individual rewards program you choose, and on your own financial habits.

The following are six questions you should ask to get a handle on the costs and benefits of any credit card rewards program:

  1. What is the cash equivalent redemption value?

    Points, miles, and cash can seem like comparing apples, oranges, and bananas, but if you read through the terms for earning and redeeming points, you can determine the cash equivalent value of points and miles. For example, miles are almost never literally redeemable for an given number of miles of air travel; they are convertible in some proportion to credit towards the purchase of air travel. In this sense, "miles" is just another word for points. As a recent US News & World Report article detailed, points are often -- but not always -- redeemable at a rate of one cent for every dollar spent, which is also pretty standard for cash back programs. In the end, points, miles, and cash can all be converted into spending power, and the terms for doing so will tell you what the cash equivalent value of each one is. Note that unless points and miles are convertible at a higher rate than you would earn as cash back, there is little point in limiting yourself to the things that can be purchased with points or miles.

  2. What rewards would you be likely to purchase anyway?

    It makes little sense to earn rewards for things you don't want and can't use, so make sure points or miles are redeemable for things you would want to purchase anyway. Also, whether it's points, miles, or cash, if you spend more than you normally would just to earn rewards, then those rewards are costing rather than saving you money.

  3. What are the fee differences?

    Compare the fees on rewards cards to those on non-rewards cards to see how much extra participating in a rewards program might cost you. Compare any extra fees with the cash equivalent value of rewards you are likely to earn. Obviously, if you are paying $100 more in fees just to earn $50 worth of rewards, it isn't worth it. If you need help interpreting the jargon credit card companies use to describe their fees and other terms, you can refer to a helpful glossary of credit card contract definitions prepared by the Consumer Financial Protection Bureau.

  4. What are the interest rate differences?

    The Federal Reserve Board reports that as of August of 2013, the average rate being charged on American credit card balances was 13.11 percent. If you compare the rate on a rewards card to this average, you might get a sense of how much extra interest that rewards program might cost you. Of course, the other variable in this is how much of a balance you tend to carry over on your card from month to month, and you can avoid the extra interest expense altogether by paying your balance off in full each month.

  5. What are the caps and restrictions?

    When you are adding up the potential cash value of the rewards, be sure to factor in any limits on the total amount of rewards that can be redeemed, or any restrictions on when and how they can be used.

  6. What are your redemption habits?

    Finally, ask yourself this: are you the kind of person who systematically redeems every coupon you find, or are you the type who has been walking around for two years with unused gift cards in your wallet? The point is, people have vastly different habits when it comes to going through the procedures necessary to benefit from things like reward programs, so don't sign up unless you are confident that you will follow through with regular redemptions.

All things being equal, a cash-back program gives you the most flexibility. However, a credit card program which awards points or miles at a higher cash-equivalent rate than a cash-back program can be worth more to you, as long as you really need the things for which those points or miles can be redeemed. Finally, remember the cost side of this equation. Look for rewards programs with the lowest fees, and eliminate any potential interest rate premium by paying your balance in full each month.

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