Cash back credit cards are one of the most popular reward cards among consumers. However, many people are unaware that cash back cards fall into small sub-categories. The main two groups are true cash back and statement credit. Know the difference between the two and how they operate can go a long way in making sure you're happy with the next card you sign up for.
Cash Back vs Statement Credit: Understand the Difference
Cash back can sometimes be a bit of a misnomer. Not all cash back credit cards provide you with actual cash rewards. As a matter of fact, a majority of offers end up giving points to cardholders. Those can then be redeemed for a number of things. Among those redemption options, you may find that "cash back" is one of the choices you have. In certain circumstances, however, a card may not give you a cash back option, and instead allow you to redeem points for statement credit. This means you will use your rewards to wipe out debt on your bill. This is an important distinction to understand. Imagine you decide to stop using your rewards credit card – whether it’s because you switch to another payment method or a better card. If you have a true cash back credit card, you can have a check mailed to you or have the money deposited into a bank account. However, if your only option is statement credit, you cannot use those points unless you make more purchases on your card. Therefore, your reward points will lock you into making further purchases. You will then earn more points on those purchases, and almost certainly end up with some pool of rewards you’ll never use. There may be no option to “cash out”.
You can typically find out whether a credit card allows rewards to be traded in for statement credit or cash in the terms and conditions. If this is a distinction that matters to you, make sure to read up on it before you apply.
Is Cash Back Always The Best Option?
Assume that you sign up for a credit card that is pushing you to redeeming your points as cash back -- whether this is through marketing material or some other suggestions. Does that mean you should follow the instructions? Not necessarily. Always be mindful of your options, and their potential value. You never know if another way of using your points may end up giving you a better return.
Specifically, you should examine options to redeem for brand-specific products or services. Certain issuers may have deals worked out with some stores or retailers to give their cardholders slightly better returns for the business they provide them. This can include things like gift cards, or even transfers to certain airline or hotel loyalty programs.
Use the following trick to figure out the best possible redemption for your points:
- Take the necessary number of points needed for a redemption, and divide it by its dollar value. For example, if you need 1,000 points to get $10 in cash back, the value of a single point is $10 / 1,000 = $0.01.
- Repeat the above process for all the options that exist for your rewards currency.
- Imagine that our only other option was redeeming our points for a $20 gift card at your favorite retailer. You need 500 points for this redemption. That works out to $20 / 500 = $0.04 per point. Four times better than had you used your rewards on cash back.
The above exercise is simple enough to work through, and as you can see it can make a huge impact on your end results. All you need is a piece of paper and a calculator. Better yet, you only have to run through this math one time. Investing the 10-20 minutes to figure out the value of all your redemption options can greatly influence how you use your rewards for years to come.