Credit Card Points vs. Cash Back: Understanding the Key Differences

Jason SteeleUpdated September 27, 2022

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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

On top of being a convenient way to pay, credit cards also typically offer additional perks like cash back or flexible reward points.With cash back, you are essentially getting paid for spending money. A card that offers rewards points, on the other hand, can help you get closer to booking that awesome vacation. When it comes to points vs. cash back, which one wins?It depends. Both types of cards have their unique benefits and drawbacks. Read on for a closer look at cash back vs. points to help you decide which kind of rewards card will give you the biggest bang for your buck.

What Are Credit Card Points?

Sometimes referred to as miles, credit card points are awarded to credit card users based on their spending, such as one point for every dollar spent. Card users may also be able to earn extra points by participating in special promotions, such as getting 30,000 points for $3,000 within the first three months, or three points per dollar on purchases in certain categories such as gas, travel, or groceries. Depending on the loyalty program, you may be able to redeem credit card points for airline/hotel reservations, merchandise, gift cards, or cash back. Typically, you’ll get the most value if you use points to book travel directly through the credit card’s portal or by transferring your points to a partner hotel’s, or airline’s, loyalty program.Some travel rewards credit cards also include valuable extra perks like primary auto rental coverage, airport lounge membership, and trip cancellation and interruption insurance.

Pros and Cons of Credit Card Points

One of the biggest advantages of points is that they can potentially be worth more than cash back when you use them to book travel, whether it’s an airline ticket or a hotel stay. Points cards also often offer generous introductory bonuses.Another upside is that points cards typically offer additional benefits. For instance, a co-branded airline card may offer free checked bags or seat upgrades if you fly with that airline, while general points cards may offer extra perks, such as access to airport lounges.On the downside, points cards tend to cost more, since some of the best rewards credit cards have high annual fees. If you’re paying a high fee for a card, it may take some time to “break even” with reward points. Redeeming points can also be a complicated process and, if you don’t end up redeeming them, you can end up losing your points value or not getting any benefits from the card.

Pros of Credit Cards with Points	Cons of Credit Cards with Points
Can offer a higher value when redeemed compared to cash back	Best points cards often come with hefty annual fees
Often offer generous introductory bonuses	Redeeming points is not automatic and is often more complex than redeeming cash back
Often come with added travel-related perks	The value of points can vary based on how you redeem them

Recommended: 8 Advantages of Credit Cards

What Is Credit Card Cash Back?

Cash back cards offer just that – cash back for spending. Typically, the cash you earn is a percentage of the amount spent. Some cards offer a flat-rate cash back rate, which means you earn the same rate on every purchase, while others offer a higher rate in some categories, Some of the best cash back credit cards, for example, offer bonus rewards (such as 3% or more back) in fixed or rotating categories throughout the year. Like points cards, cash back cards often offer new account bonuses. For example, a card might offer new applicants $150 in cash back if they spend $1,000 in the first three months. Generally, you can redeem rewards for a credit on your statement. Or, you may be able to redeem them for gift cards, a check, or a direct deposit to a bank account.

Pros and Cons of Credit Card Cash Back

One of the main advantages of cash back cards is that the cash can be used for anything from clothing to car repairs. It’s your choice. Another positive is that these cards tend to have no, or a low, annual fee. As a result, it typically doesn’t take long to “break even” with this type of card.Cash back cards are also straightforward and easy to use. In some cases, the cash back is automatic and you don’t have to do anything to redeem your reward. And, unlike points cards, you don’t have to make purchases through a specific portal or worry about transferring points to a partner brand.On the downside, cards that offer extra cash back in certain spending categories will often have an earning cap, after which you only earn a low flat rate. Another negative is that sign-up bonuses offered by cash back cards tend to be modest when compared with those offered by points-based cards. Plus, cash back cards typically don’t offer any additional benefits, such as travel perks.

Pros of Cash Back Credit Cards	Cons of Cash Back Credit Cards
Simple to understand and redeem	May cap how much you can earn in bonus categories
Can be used to pay for anything you like	Often offer less valuable new account bonuses than points cards
Most cash back cards have no annual fee	Offer limited extra perks

Differences Between Credit Card Points and Cash Back

Points Credit Cards	Cash Back Cards
Cash back comes in the form of a fixed percentage of the amount you spend	Points are awarded based on spending and have varying values depending on how they are redeemed
Typically no annual fee	Typically comes with an annual fee
Rewards can be used to pay for anything you like	Rewards are typically geared towards travel
Often offers premium additional benefits	Typically offer minimal extra benefits

Guide to Using Points Credit Cards vs. Cash Back Credit Cards

The best credit cards offer generous rewards like points and cash back. Whether a points card or a cash back card is a better deal ultimately depends on your spending patterns and lifestyle, as well as how much effort you are willing to put into learning how to use your rewards. If you travel a lot, you may want to go with a points card. This type of card can help you save money on travel-related expenses like airline tickets and hotel stays. Plus, you take full advantage of travel-related perks. If, on the other hand, you rarely travel, enjoy simplicity, and prefer a no-fee card, you may be better off with a cash back card. If you’re torn between the two options, you may want to look for a card that offers points that can be redeemed for cash.

Maximizing Credit Card Points and Cash Back Rewards

To get the maximum value from your points and cash back credit cards, it’s important to understand exactly what the rewards are and how they work. If your card has rotating reward categories or an introductory bonus rewards period, for example, it’s a good idea to mark it on your calendar, so you can time your purchases accordingly and max out your rewards.Another way to maximize rewards is to use your credit card to charge all of your purchases. That doesn’t mean overspending, just using your card when you do your normal spending. It’s still important to understand how credit cards work and, ideally, pay your balance in full each month. If you rack up interest, it can eat up any rewards or cash back you earn.If you have to actively cash in your reward points, you’ll want to be sure that you do, even if the process isn’t exactly intuitive. When you do, it’s also a good idea to take note of exactly how much you got in return. If you aren’t getting enough value per point redeemed, it may be time to switch cards.

The Takeaway

There’s no such thing as a one-size-fits-all credit card. The right type of rewards card for you will depend on your spending habits, budget, and personal preferences. When choosing a credit card, it’s a good idea to compare not only the annual percentage rate (APR), but also annual fees, rewards, and added benefits.If you’re looking for an easy way to weigh your options, Lantern by SoFi can help. With our credit card marketplace, you can quickly compare offers from multiple credit card issuers all in one place, and without making any commitment.

Photo credit: iStock/PeopleImages

Frequently Asked Questions

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About the Author

Jason Steele

Jason Steele has been writing about credit cards and award travel since 2008. One of the nation's leading experts in this field, he has contributed to dozens of personal finance and travel outlets and has been widely quoted in the mainstream media.

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