Cash Back vs. Miles: How to Choose the Right Credit Card
by Matt Frankel, CFP | Dec. 28, 2018
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The best rewards credit card for you depends on what perks and rewards give you the most value. Here’s how to figure out which one to apply for.
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There are several varieties of rewards credit cards, but two of the biggest categories are credit cards that earn cash-back rewards and cards that earn miles. While there’s no one-size-fits-all answer regarding which is best, here’s a rundown of the advantages and potential drawbacks of both types of rewards, and what you should consider before deciding which credit card is right for you.
The main advantage of cash-back credit cards
The most obvious advantage cash-back credit cards have over those that offer airline miles is flexibility. With cash back, there are several ways you can redeem your reward points. You might be able to get a statement credit, erase individual purchases, or request that a check be mailed to your home. Many cash back credit card companies have online stores where you can spend your points -- and you can sometimes even get a discount for doing so.
It’s also important to point out that cash-back rewards rates have improved significantly in recent years. Historically, a 1% cash-back rate was the industry standard -- in other words, you could expect to get $1 back for every $100 you spent on your cash-back credit card.
Now, some of the best cash-back credit cards offer rewards rates of 1.5% or even 2%, and some have rates of as high as 5% in rotating categories.
Two kinds of miles
It’s important to mention that there are two types of miles offered by credit cards. Airline co-branded credit cards offer miles that can be redeemed on a specific airline. For example, American Express’ series of Delta co-branded credit cards all earn Delta SkyMiles.
On the other hand, there are many travel credit cards that aren’t tied to a specific airline, and therefore offer miles that aren’t airline-specific. The Capital One Venture Rewards credit card is a good example. While Capital One refers to the Venture card’s rewards currency as “miles,” its rewards program works very differently when compared with an airline’s frequent flyer miles program.
Airline miles can offer serious value for smart travelers
For the most part, the industry standard rewards rate for airline co-branded credit cards is still one mile per dollar. Some offer higher rates, but often only on airline purchases.
On the surface, it may seem that this puts airline miles credit cards at a clear disadvantage since there are no-annual-fee cash back cards with rewards rates of twice as much.
However, as my colleague Elizabeth Aldrich pointed out in her review of the Delta-branded credit card I just referenced, airline miles have some grey area when it comes to their value. In Delta’s case, most experts value Delta SkyMiles® at about $0.012 each, but there are often flight redemption options that value SkyMiles at $0.03 per mile or more. As a simplified example, you could potentially find a flight selling for $3,000 for 100,000 SkyMiles. The point is that comparing the value of cash back points with airline miles isn’t an apples-to-apples comparison.
One potential downside is that airline-branded credit cards almost always have an annual fee -- although it may be waived for the first year in some cases. However, airline credit cards often offer fantastic sign-on bonuses, and generally, have some other potentially-valuable perks which I’ll discuss in a bit.
Credit card “miles” are more flexible
The other type of “miles” are those that aren’t connected to a specific airline. For example, the Capital One® Venture® Rewards Credit Card refers to its rewards currency as miles, but they aren’t tied to any airline. In fact, you don’t have to use them for travel at all. Venture® Miles redemption options actually include cash back, but you don’t get quite as much value if you choose this option.
When you redeem these more generic miles for travel, you generally get $0.01 per mile towards whatever airline ticket, hotel room, rental car, or other travel purchase you book. And, like the best cash back cards, you can find options with a 2% rewards rate.
It’s important to note that unlike most of the popular cash-back credit cards, these types of mile-earning credit cards typically have an annual fee. For example, the Capital One® Venture® Rewards Credit Card that I just mentioned has a $95 annual fee, but you get some value-adding perks like a credit for TSA Pre-Check as well as the ability to earn 10 miles per dollar on many hotel purchases.
Don’t forget about the other features of these credit cards
You can find fantastic cash-back credit cards with no annual fee. In fact, the majority of our list of the best no-annual-fee credit cards consists of cash-back cards. On the other hand, as I mentioned, the same is generally not true with cards that earn miles. Many credit cards that are either co-branded with an airline and even those that earn more generic “miles” are not free.
However, it’s important to mention that the value in many of these cards goes far beyond the reward program itself. Just to name one example, I have the Platinum Delta SkyMiles® Credit Card from American Express in my wallet right now. The card has a $195 annual fee, which may sound like a lot, but consider some of the perks I get:
- Free checked bags for me and whoever I’m traveling with (on the same reservation).
- 20% off in-flight Delta purchases.
- A free coach companion certificate each year upon renewal. This is essentially a buy-one-get-one airline ticket and can easily justify the annual fee all by itself.
- 10,000 bonus Medallion Qualification Miles (MQMs -- the ones that help you earn elite status) and 10,000 bonus SkyMiles® after $25,000 in spending during a calendar year, and another 10,000 of each after $50,000.
The point is that if you add up all of these benefits, their value can be several times the $195 annual fee, especially if you travel frequently or use your card often. Many of our picks for the best airline credit cards have a similar array of perks that could translate into tremendous value for the right cardholder. Other perks airline credit cards often offer include rental car insurance, airport lounge access, and baggage insurance, just to name a few. And, many airlines have partner airlines and even hotel chains that you may be able to transfer your miles to in order to really maximize their value.
On the other hand, most no-annual-fee cash-back credit cards don’t offer nearly as many additional perks, especially when it comes to travel. So, if you’re a frequent traveler, this could be a major downside of using a cash-back credit card for your purchases.
In addition, many airlines have more than one level of credit card. In Delta’s case, the American Express co-branded credit cards come in four levels -- Blue (no annual fee, but few perks), Gold, Platinum, and Reserve ($450 annual fee, most perks). So, depending on the frequency of your travel, there could be one that is better for you than the others.
It all depends what rewards you’ll actually use
The value you get from any credit card depends on your personal needs and financial goals. For example, I mentioned that Delta SkyMiles® can have tremendous value, but this is only true if you like to travel and are willing to put in the time and effort to find the best redemption options.
The bottom line is that whether a cash-back credit card delivers the most value or if you would be better off with a miles-earning credit card depends on you. There’s no one-size-fits-all answer, so the best move is to compare some of the best credit cards in both categories and decide which is best for you.
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About the Author
Matt is a Certified Financial Planner® and investment advisor based in Columbia, South Carolina. He writes personal finance and investment advice, and in 2017 he received the SABEW Best in Business Award.
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 does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
