Consumers shopping around for a rewards credit card are often faced with a choice between different rewards types. The two most popular choices tend to be cash back and airline credit cards. The type of credit card that will provide you with the highest value will depend on a number of factors, which will differ by behavior and spending habits. This guide will help consumers come to understand whether cash back or airline credit cards work best for them. To that end, all they need to do is answer, for themselves, the following four questions.
- Will this be your first credit card? With the exception of a few, cashback credit cards come with no annual fee -- making them the ideal choice for a first credit card. It is best for your credit score that you keep your first credit account open as long as possible -- if your first credit card has an annual fee, you will always have to worry about the upkeep cost of that card, regardless of your financial situation.
The top airline credit cards, unfortunately, come with a cost. The median annual fee of an airline-affiliated card is $80. That is quite the price to pay, especially if your spending doesn't earn you enough to justify that price tag. Assuming, for example, that your airline credit card is averaging you a reward rate of three percent, based on your spending, you will need to make $2,667 in purchases every year, in order to simply break even on the cost of the average annual fee.
Since you are getting two percent back on everyday purchase with a good cash back card, versus just one percent on a typical airline credit card, it would take $56,000 in purchases before the difference between the average bonuses is compensated for. This, of course, is a simplified example which assumes you are not using the airline card to make purchases at a two percent+ rewards rate. If that was the case, you would have to spend a lot more money before the cash back card made up the difference.
If you don't care about finding the best deals, and squeezing out the highest value for your airline miles, a cash back credit card is the better choice. These cards simplify your redemption, and are often just applied across the board to your credit card statement. There are no headaches about redemption, or optimal point usage.