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

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

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Without a doubt, you've come across credit cards that promise "5% cash back" or "3 points on all dining and restaurant purchases." Points, percentages and miles are everywhere when it comes to credit card rewards. It may be challenging to comprehend the various offers without a firm grasp of the rewards systems or how much the points are worth.

Here in this guide, we help you make heads and tails of credit card points, miles and cash back. You'll understand which type of credit card rewards suits your spending best and be able to shop for the credit card that is best for you.

Cash back, points or miles: what's the difference?

Credit cards that offer rewards, ranging from cash back, points or miles. At its core, all three things work in the same way. Whenever you spend on a rewards credit card, you'll earn one of the three benefits mentioned above as a 'thank you' from your credit issuer.

The main difference between cash back, points and miles is the flexibility they provide to consumers. If you're awarded points, you can redeem them for various prizes and services. If you earn miles, they will generally be tied to a specific airline's frequent flyer program. Miles tend to have a more limited capacity than points — most often, they can only be redeemed for airline tickets. Usually, points and miles are interchangeable. Rather than knowing if you'll earn cash back, points or miles, it's more important to see if you'll earn general travel, airline or hotel rewards.

Finally, cashback rewards are the most flexible and straightforward to understand. If a credit card earns users cash back, it simply returns a certain percentage of their purchases to the consumer — just like a rebate.

An in-depth look at cashback rewards

Cashback credit cards are generally the easiest to understand, but they're not always as upfront as they appear to be. Below are the three most common features of cashback rewards to keep in mind so that you avoid trouble.

Pros

  • Easy-to-understand rewards rate, great for everyday spending

Cons

  • Cash back most likely comes in statement credit, takes a few billing cycles for cash back rewards to process

Since cashback credit cards are mostly entry-level cards, they'll come with simple rewards rates and offer excellent return rates on everyday spending. The downsides are that your cashback rewards will most likely come in the form of a statement credit (rather than a direct deposit or cash) and aren't immediately deposited into your account.

Some cashback rewards are based on points

Even though many credit cards in the market are advertised as "cash back," many are actually points-earning cards with a primary redemption method of cash back. Instead of your purchases being automatically credited with cashback to your account, you'll accumulate points instead. It's then up to you to exchange your points to get cash back.

For example, the Chase Freedom Flex℠ is branded as a "cashback credit card," but it earns points through the Chase Ultimate Rewards portal. 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. This will discuss rewards along with any related fees:

Some cashback rewards are based on points

Most likely, you'll earn cash back in the form of a statement credit

Cash back is typically awarded in the form of a statement credit to pay off existing charges on your account balance. If you made $100 in purchases in one month, with a 2% back credit card, you would earn $2 in statement credit. As soon as the rewards are credited to your account, you can lower your credit card bill by $2. Some credit cards will allow you to deposit cash back to a savings or checking account with the same back — or issue you a check — although this isn't the norm.

Cash back isn't a discount

Most cashback credit cards take one to two billing cycles before applying the rewards to your account. Other cards don't give you cash back until you have accumulated a minimum threshold of rewards — in some cases, you'll need at least $25 built up. The bank has this buffer to verify your account is in good standing before your rewards are handed out.

Therefore, you shouldn't think of cash back as a discount. You shouldn't think, "I'll get 2% off on top of what I buy." That 2% will take some time to post to your account. Check your credit card issuer's terms and conditions to find processing periods and information about minimum redemption thresholds.

Travel rewards cards: points and miles

Instead of cash back, some credit card rewards programs are based around points. These can later be redeemed on a number of different items and services, varying from issuer to issuer. While you may have come across "points" or "miles," these terms are interchangeable and will mostly operate in the same way.

The major difference among these various rewards credit cards is what you can redeem your points or miles for. For example, if your airline co-branded credit card rewards you with miles, you'll most likely only be able to redeem those on airfare. When you see a program giving out points, it tends to allow for a more generous amount of freedom. Some points can also be turned into gift cards or cash back.

Whether your credit card collects frequent flyer miles or points, you have to keep in mind that it's up to you to redeem them. While you earn points automatically, they won't be turned into rewards without your due diligence. Many points and miles will expire, so you don't want them to go to waste. To redeem your rewards, you will either log in to your online rewards portal or call the customer service line.

Points, just like miles, are designed with travelers in mind. While you can redeem points for other rewards, using them for travel tends to provide the greatest value. Below we highlight the three credit card reward programs based around points and miles: general travel rewards cards, airline cards and hotel cards.

General travel points and miles

Some of the biggest credit card rewards programs — Chase Ultimate Rewards, Citi ThankYou and American Express Membership Rewards — reward users with points. General travel points are the most flexible out of any rewards system out there, and they can be used to book flights with many different airlines or even be used as straight cash back.

Pros

  • Most flexible rewards, travel redemption options

Cons

  • Confusing rewards rates, takes a few billing cycles for travel rewards to process

You'll get the highest returns when you redeem your points for travel, but you'll also have tons of other redemption options. However, it can be hard to decipher whether you're getting the most value for your points. Similarly to cashback cards, your points will take some time to deposit into your account, so you may not be able to use your rewards immediately.

Airline rewards points and miles

Some credit cards — airline credit cards — are co-branded with a specific airline, and you'll earn frequent flyer miles every time you spend on your card.

Pros

  • Great for loyal flyers, earn free flights or elite status

Cons

  • Rewards restricted to one airline

Airline credit cards are ideal for consumers who are loyal to one airline. For instance, if you frequently travel with Southwest Airlines, it makes sense to use a credit card that will accumulate points on Southwest and earn Southwest-related perks. If you tend to fly multiple airlines, you'll want to opt for a general travel rewards card so that you're not restricted to one loyalty program.

Note that Southwest and JetBlue refers to its rewards as "points" rather than "miles." Again, these terms are interchangeable, as the Southwest Rapid Rewards® and JetBlue TrueBlue programs operate similarly to other airline rewards programs.

Elite qualifying miles vs. airline miles

Airlines will also have a separate elite status program, granting you exclusive perks such as complimentary seat upgrades. To qualify for elite status on an airline, you'll need to meet a threshold of miles — earned either through spending or flying. However, these elite-qualifying miles are separate from airline miles that you earn, so it's important to know that these two rewards systems are distinct.

Hotel rewards points

Like airline credit cards, hotel credit cards are co-branded with a particular hotel and resort chain. Hotel credit cards will earn points, and their rewards work similarly to airline miles. You'll earn points through credit card spending, which can later be used for hotel stays, room upgrades and or more.

Pros

  • Earn free hotel nights, upgrades or elite status

Cons

  • Rewards restricted to one hotel, hotel points typically have lower value

Hotel credit cards offer the ability to redeem your points for free hotel nights and upgrades, or you can even work toward elite status for even more exclusive perks. However, hotel points tend to have lower redemption value than airline miles, and this rewards system isn't ideal for those who stay at multiple hotel chains.

Cash back vs. points vs. miles: How to compare them

Now that you understand how cash back, points and miles work, you'll need to understand their rewards rates. Often presented as a percentage, this will indicate how much value your credit card will give back. Most rewards credit cards will offer you a higher percentage on specific categories. For example, if one credit card offers you 5% on grocery stores while another provides a mere 1%, you would use the former card on groceries. When it comes to cashback cards, the rewards rate is straightforward since you'll know upfront how much you'll get in return.

For all other cards, the rewards rate takes a little bit more work to understand. The first step is to figure out how much each point is worth. You'll divide the dollar value of a particular redemption (for example, a flight) by the number of points required. This number will produce the value of dollars per point. Then, multiply that value by the number of points you get per dollar spent, then this final value by 100. The end result is the percentage rewards rate, which will help you compare to rewards cards that already provide a percentage value.

How to calculate the value of airline miles

Cash price (minus taxes and fees) / Number of points needed for hotel stay = Points value for that specific reservation

How to calculate the value of hotel points

Cash price (including taxes and fees) / Number of points needed for hotel stay = Points value for that specific reservation

Imagine that an airline requires 20,000 miles for a flight from New York to Chicago or $200 in cash. Therefore, each mile is worth 1 cent each ($200/20,000). If that credit card offers 3 miles for every $1 you spend, its reward rate is $0.01 x 3 x 100 = 3%.

Most credit cards will have multiple rewards rates. For example, you may earn 3 miles per $1 when shopping at grocery stores and 1 mile per $1 on all other purchases. In that case, your rewards rate will vary depending on where you shop. Once you calculate these rewards rates, you can effectively compare credit cards with varying rewards systems. This way, if a cashback credit card provides a user with 2% cash back on travel, while a points card produces a 3% rewards rate on travel, we'll recommend the latter to consumers interested in travel rewards.

We've calculated the rewards rate on travel purchases for various cards in the table below, using ValuePenguin estimated points/miles values for each of the card's rewards programs. We've included the top cashback cards, the Citi® Double Cash Card – 18 month BT offer (which earns 2% back on every dollar spent) for comparison.

rewards rate on travel purchases

The Hilton Honors Aspire Card from American Express earns one of the highest rewards rates on travel purchases at 7% (despite the low value of Hilton Honors points) — though this rate is limited to Hilton hotel purchases. In fact, most of the travel cards in our example table earn a higher rate on travel than the Citi® Double Cash Card – 18 month BT offer. If you spend heavily on travel and stick to redeeming your points/miles for travel purchases, you can get a much better return with a travel rewards card than a cashback card.

Transferring credit card points to airline miles and hotel points

One final note is that some general travel rewards credit cards allow you to transfer your points to hotel or 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 Rewards. However, not all credit cards offered by these issuers allow you to transfer points, so it's essential to check with the issuer to see if your card will earn rewards points.

Your points will transfer at varying ratios depending on the rewards program. For example, Chase Ultimate Rewards transfer at a 1:1 ratio, meaning that 1,000 Ultimate Rewards points equate to 1,000 points or miles to any of its loyalty partners.

Airline partners
Hotel partners
Amex Membership RewardsAlitalia MilleMiglia
Asia Miles™
British Airways Executive Club
Delta SkyMiles®
Emirates Skywards®
Etihad Guest
Finnair Plus
Flying Blue Air France KLM
Iberia Plus
Qantas Frequent Flyer
SAS EuroBonus
Singapore Airlines KrisFlyer
Virgin Atlantic Flying Club
Hilton Honors
Marriott Bonvoy™
Radisson Rewards™
Capital One MilesAeromexico Club Premier
Air Canada Aeroplan
Alitalia MilleMiglia
Asia Miles
Avianca Lifemiles
Emirates Skywards®
Etihad Guest
EVA Air Infinity MileageLands
Finnair Plus
Flying Blue Air France KLM
JetBlue TrueBlue
Qantas Frequent Flyer
Singapore Airlines KrisFlyer
ALL Accor Live Limitless
Wyndham Rewards
Chase Ultimate RewardsAer Lingus AerClub
Air Canada Aeroplan
British Airways Executive Club
Emirates Skywards®
Flying Blue Air France KLM
Iberia Plus
JetBlue TrueBlue
Singapore Airlines KrisFlyer
Southwest Airlines Rapid Rewards®
United MileagePlus®
Virgin Atlantic Flying Club
IHG® Rewards Club
Marriott Bonvoy™
World of Hyatt®
Citi ThankYou PointsAeroMexico Club Premier
Asia Miles™
Avianca LifeMiles
Emirates Skywards®
Etihad Guest
EVA Air Infinity MileageLands
Flying Blue Air France KLM
InterMiles
Malaysia Airlines Enrich
Qantas Frequent Flyer
Qatar Airways Privilege Club
Singapore Airlines KrisFlyer
Thai Airways Royal Orchid Plus
JetBlue TrueBlue
Turkish Airlines Miles & Smiles
Virgin Atlantic Flying Club
N/A

ValuePenguin's verdict

Whether you earn cash back, points or miles, you'll want to get a firm grasp on the rewards rate and redemption options available. If you're looking for a new credit card, you'll want to find the rewards system that works best for your lifestyle. For example, if you only want to use a credit card for everyday spending — such as groceries and gas — you'll want to find a rewards rate that will provide the highest returns on these purchases. For frequent travelers, owning a travel credit card can help you maximize your travel purchases and earn free flights or hotel stays. While it takes some time to understand what your credit card has to offer, the rewards stack up and can save you tons of money in the long run.

The information related to Hilton Honors Aspire Card from American Express and The Amex EveryDay® Credit Card from American Express has been independently collected by ValuePenguin and has not been reviewed or provided by the issuer of this card prior to publication. Terms apply to American Express credit card offers. See americanexpress.com for more information.

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).