When you are looking for a rewards credit card, you will notice that you can get cashback, points or miles in rewards. Most consumers choose cash back because cash is easy to understand. Once you get the cash, you are free to spend it as you wish, whereas redeeming miles or points can be complicated. The value of the miles or points can vary, and are not readily usable like cash.
But if you are willing to spend some to understand how credit card points or miles work, you will quickly realize that they offer much better rewards than simple cashback. For the rest of the article, we will discuss credit card points rather than credit card miles because there are more points credit cards on the market. Miles credit cards are generally offered by airlines, though there are exceptions.
Cash Back Vs Points – How do they work?
A simple 2% cashback credit card will give you 2% cashback on all purchases. If you spend $20,000 a year, you will $400 a year in cashback.
Points work exactly the same way except you get points instead of cash. Many cards on the market offer 1 point for every dollar spent. If you spend $20,000 a year, you will get 20,000 points. Some credit cards may offer 2 or 3 points per dollar spent on specific categories like travel and dining.
You can typically redeem points for flights or hotels at 1.5 cents to 2 cents per point. The value of points from credit cards can give you more than the 2% cash back you can get from a cashback credit card.
How To Redeem Points
There are a number of ways to redeem the points. First, credit card companies like Chase and American Express have their own travel portals where you can book flights and hotels using your points. Second, you can transfer your points to travel partners – airlines, hotels, car rentals, etc. Points can be transferred on a 1:1 ratio in most cases, but it can differ based on the transfer partner.
For example, it’s possible to book a basic economy United flight for as little as 5,000 points. Similarly, you can book a room at Hyatt for 5,000 points. First-class tickets and luxury hotels cost more points.
By using points to book flights and hotels, you can get much more than 2%. Look up the flight ticket on Expedia, and compare it to how many points it costs, and you calculate the value of your points for that transaction. Anything close to 2 cents per point is pretty good.
Who Is An Ideal Customer For a Points Card?
Points credit cards are ideal for people who travel. You don’t have to be a Monday-Thursday travel consultant. Even if you take only a vacation or two, these cards can be incredibly useful. Your annual spending on the credit card will easily pay for flights or a couple of nights at the hotel.
If you don’t travel at all or stay at hotels, then you are better off with a cashback card.
You Need A Points Strategy For Earning and Redeeming
To fully enjoy the rewards of points-based credit card, you need a plan. You need to be organized and have a strategy in place as to when to pay cash, and when to pay with points. People with multiple credit cards also need to choose which credit cards to use where? For example, the credit card that offers 3X points on dining is the one you should use at a restaurant.
But once you start putting your plan in practice, things get easy. You will intuitively know which card to use where, and how to redeem points for maximum benefit. Sometimes, you are better off using points for flights, other times you will get the most of the points by using them to book a hotel.
Bottom Line
Credit cards offering reward points work great for people who travel. You can use points to pay for hotels, flight tickets, and car rentals. To fully enjoy the benefits, you need to be organized with your spending and need to plan ahead when redeeming points. If you don’t spend much on flights or hotels, you are better off with a simple cash back card.
