Cash Back, Miles, or Points: Understanding the Different Credit Card Rewards

Cash Back, Miles, or Points: Understanding the Different Credit Card Rewards

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You’ve no doubt come across credit card offers promising “5% cash back”, “3 points on all dining and restaurant purchases”, and so on. Points, percentages, and miles are everywhere when it comes to credit card rewards. It may be difficult sifting through various offers without a firm grasp on what these things are or how much they are ultimately worth. Here in this guide, we help you make heads and tails of the credit card points, miles, and cash back offers. You will better understand which type of credit card rewards performs best for your spending, and be able to shop for the credit card that is best for you.

Cash Back, Points, or Miles: What's the Difference?

The main difference between cash back, points, and miles is the flexibility they provide to consumers. At their core, all three things work in the same way. Whenever you make a purchase using a rewards credit card, you will earn one of the three aforementioned benefits as a 'thank you' from your credit issuer. If you are awarded points, they can be redeemed for different prizes and services - the exact things your points can be used on is decided upon by each card's issuer. Miles earned through a credit card are generally tied to a specific airline's frequent flyer program. They tend to have a more limited capacity than points - most often, they can only be redeemed for airline tickets. Finally, cash back rewards are the most flexible and straightforward to understand. If a credit card earns users cashback, it simply returns a certain percentage of their purchases back to the consumer - just like a rebate.

When speaking of 'miles', we are referring to miles earned through co-branded credit cards – such as the Southwest Rapid Rewards® Premier Credit Card. Other cards, like the Discover it® Miles, award users what they call “miles” but are functionally more like points – that is, they can be redeemed for more things than simply flights with that airline.

A More In-Depth Look at Cash Back Rewards

Cash back credit cards are generally the easiest to understand, but there are a number of nuances to keep in mind. They're not always as upfront as they appear to be. Below are the three most common features of cash back rewards to keep in mind, so that you avoid trouble.

Some cash back rewards are based around points.

Even though a number of credit cards in the market are advertised as "cash back", they are in fact point cards whose main method of redemption is cash back. Instead of your purchases being automatically credited with the standard cash back rebate, these types of cash back rewards accumulate points on your account. It is up to you to then exchange your points to get cash back. Example: Chase Freedom®. Figuring out whether a credit card gives you pure cash back or points is not always obvious - you must read through the "Terms & Conditions" or offer details. The portion discussing rewards will usually be below all the fees/finance charges listed, as seen in the image below.

This image highlights the area in consumers' terms & conditions that they can find more information on their credit card rewards

Cash back is usually awarded in the form of statement credit. The cash back is generally applied to your credit card statement to pay off charges – instead of being issued as a check. For example, if during the course of a month, you made $100 in purchases, with a 2% back credit card you would have $2 in statement credit. That way, as soon as the rewards are credited to your account, you will be able to lower your bill by that $2. Some credit cards allow you to deposit cash back to a savings or checking account with the same bank - though these cards are more rare.

Don’t think of cash back as a discount. Most cash back credit cards take 1-2 billing cycles before applying the rewards to your account or don't kick in until you have accumulated a minimum amount of rewards. This is done so that the bank can verify your account is in good standing, and you are not delinquent in payments. Going back to our above example, if you can only afford to make $98 in purchases, you shouldn’t go over that limit, while thinking “I will get 2% off on top of what I buy”. That 2% will take some time to post to your account. Additionally, your credit card company could very well not pay out any cash back until you hit a minimum threshold, like at least $25 in rewards. Look into the same section pictured above for processing periods and minimum redemption thresholds.

Credit Card Points Miles

Another type of credit card reward program is one based around points. Instead of giving you back a percentage of each charge you put on the credit card, these rewards programs allow you to earn points. These can later be redeemed on a number of different items and services, which vary from issuer to issuer. While you may have come across terms such as "miles", "rewards points", or any similar permutation of the term, all credit card reward programs of this type operate in the same way.

The major difference among these various rewards credit cards is what you can redeem your "points" on. For example, if your credit card rewards you co-branded miles, instead of points, chances are you will only be able to redeem those on airfare. Whenever you see a program giving out "points", it tends to allow for a greater amount of freedom. Some points, for instance, can be turned into gift cards or cash back.

Whether your credit card collects you frequent flyer miles or points, you have to keep in mind that it is up to you to redeem them. While you gather points automatically, they will not be turned into rewards without your input. This is especially important to remember in case they expire. To redeem your miles and points you have to either logon to your credit account's online portal, or call the customer service line.

Common Point/Mile Credit Card Types

Point rewards, just like miles, tend to be designed with travelers in mind. While you can redeem points for other rewards, we have observed that using them for travel-related purposes tends to provide the greatest value. Below we highlight some of the most common credit card reward programs based around the "point/mile" structure.

General Travel Points. Some of the biggest credit card rewards programs –Ultimate Rewards, ThankYou, Membership Rewards – all reward users with points. The benefit of general rewards points is that they are more flexible. They can be used to book flights with many different airlines, or even be used as straight cash back. The price for this flexibility is value. Most of the time, the rewards rates on these credit cards tend to be lower than those of airline or hotel-specific credit cards.

Airline Rewards Miles. Some credit cards are co-branded with a specific airline. Spending using these cards earns users frequent flyer miles with that partnered airline. This type of credit card is typically a good option for consumers who like to stick to a single loyalty rewards program. For instance, if you know you travel frequently with Southwest Airlines, it makes sense to use a credit card which will help you accumulate more miles with Southwest – thus allowing you to earn more miles toward your next flight.

Hotel Rewards Points. Like airline credit cards, hotel credit cards are those co-branded with a particular chain of hotels and resorts. Even though the rewards given out here are referred to as “points”, they have far more in common with airline miles than general travel points. Hotel rewards points accumulated from charging your purchases to these cards can be later be used for things such as hotel stays, room upgrades, or more. Our research has shown that, on average, hotel rewards credit cards tend to offer the greatest rewards per dollar spent.

Cash Back vs Points vs Miles: How to Compare Them?

In order to effectively differentiate between credit cards of different types, you must determine their rewards rates. This rate, often presented as a percentage, is the representation of a card's efficiency – that is how much value does it give you back, when you spend money using it? If I purchase groceries using a credit card, and one rewards me with 2% of my charge, while another gives me just 1%, I would always prefer the former. The rewards rate is explicit when it comes to cash back cards, since those tell you upfront what they will be giving you in return. For miles and points cards, unfortunately, this is not as simple. We have to calculate the rewards rate in those cases.

The first step in determining a credit card’s rewards rate is figuring out how much its miles/points are worth. To do so, you must figure out how many points/miles are needed to redeem for a certain prize. You then divide the dollar value of that prize by the number of points needed for its redemption. This produces your value of dollars per point. You then multiply that value by the number of points you get per dollar spent, and then multiply that product by 100. The end result is a percentage rewards rate. Let's walk through a simple example:

Imagine that a certain card requires 20,000 miles to book a flight from NYC to Chicago. You know that flight usually costs $200. Therefore, each mile is worth approximately $200 / 20,000 = $0.01. Now, if that credit card rewards you with 3 miles for every $1 you spend, your reward rate becomes: $0.01 x 3 x 100 = 3%.

Note, that many cards will distribute points in different ways. For example, you may earn 3 miles per $1 when shopping at grocery stores, and 1 mile per $1 on purchases of movie tickets. In that case, your rewards rate will vary depending on where you are shopping. We repeat this calculation for all the credit cards we review in order to create a basis upon which we can compare them. This way, if a cash back credit card provides a user with 2% cash back on travel purchases, while a points card produces a 3% rewards rate, we can generally recommend the latter to consumers interested in travel rewards.

Transferring Points to Miles

One final note worth making is that some point rewards programs allow you to transfer your points to hotel/airline loyalty programs. This is true for the major flagship rewards programs in the United States: American Express' Membership Rewards, Chase Ultimate Rewards, and Citi ThankYou Points. Note, not all cards offered by these issuers allow you to transfer points. If you are thinking of applying for one, or are currently enrolled and want to know if you can transfer your points to an airline, call your financial institution to find out!

Amex Membership RewardsCiti ThankYouChase Ultimate Rewards
  • Aeromexico
  • Air Canada
  • Air France / KLM
  • ANA
  • Asia Miles
  • British Airways
  • Delta
  • El Al
  • Emirates Skywards
  • Frontier Airlines
  • Hawaiian Airlines
  • Iberia Plus
  • jetBlue
  • Singapore Airlines
  • Virgin America
  • Virgin Atlantic
  • Best Western (Hotel)
  • Choice Privileges (Hotel)
  • Hilton HHonors (Hotel)
  • Starwood Preferred Guest (Hotel)
  • Asia Miles
  • Eithad Guest
  • EVA Air
  • Garuda Indonesia
  • Hilton HHonors (Hotel)
  • Malaysia Airlines
  • Qatar Airways
  • Singapore Airlines
  • Thai Airways
  • Virgin Atlantic
  • British Airways Executive Club
  • Korean Air SKYPASS
  • Southwest Airlines Rapid Rewards
  • United Mileage Plus
  • Virgin Atlantic
  • Amtrak Guest Rewards (Train)
  • Hyatt (Hotel)
  • Marriott Rewards (Hotel)
  • IHG Rewards Club (Hotel)

The information related to the Discover it® Miles has been independently collected by ValuePenguin and has not been reviewed or provided by the issuer of this card prior to publication.

Joe Resendiz

Joe Resendiz is a former investment banking analyst for Goldman Sachs, where he covered public sector and infrastructure financing. During his time on Wall Street, Joe worked closely with the debt capital markets team, which allowed him to gain unique insights into the credit market. Joe is currently a research analyst who covers credit cards and the payments industry. He earned a bachelor’s degree from the University of Texas at Austin, where he majored in finance.

These responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser's responsibility to ensure all posts and/or questions are answered.

Advertiser Disclosure: The products that appear on this site may be from companies from which ValuePenguin receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). ValuePenguin does not include all financial institutions or all products offered available in the marketplace.

How We Calculate Rewards: ValuePenguin calculates the value of rewards by estimating the dollar value of any points, miles or bonuses earned using the card less any associated annual fees. These estimates here are ValuePenguin's alone, not those of the card issuer, and have not been reviewed, approved or otherwise endorsed by the credit card issuer.

Example of how we calculate the rewards rates: When redeemed for travel through Ultimate Rewards, Chase Sapphire Preferred points are worth $0.0125 each. The card awards 2 points on travel and dining and 1 point on everything else. Therefore, we say the card has a 2.5% rewards rate on dining and travel (2 x $0.0125) and a 1.25% rewards rate on everything else (1 x $0.0125).

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