If you are researching credit cards, you have probably seen cards offering rewards in two ways: cash back or flexible rewards points. Cash back cards make it simple to understand how you earn rewards, but credit cards earning flexible points such as American Express Membership Rewards or Chase Ultimate Rewards may be tempting you with their promises of aspirational travel rewards.
How do you decide whether to pursue cash back rewards or flexible points? What are the merits of each? Are there any pitfalls? How do you make this call?
There is no one right answer to this question. The best path for you will depend on your situation, your spending patterns, what kinds of rewards you value and to some extent the amount of effort you are willing to put into learning how to use rewards. There’s no such thing as the best credit card for everyone, but understanding as much as you can about what you want and how you can achieve that will get you on the right path.
What are Flexible Points
Before getting started, let’s be clear about what we mean by flexible points. Flexible points programs are rewards programs that allow a variety of compelling redemption options including transferring points to airline, hotel and other programs. Usually transferable points currencies are programs run by banks and associated with rewards credit cards. In general, transferable points programs focus on travel rewards.
Some credit cards earn points that are only redeemable for cash back or a limited number of options at a fixed cash value; we’re not talking about those. Also, while some hotel and airline programs allow you to transfer points to other travel providers, generally these aren’t considered flexible points when the point transfer options only offer very poor redemption values.
When Flexible Points Offer More Value
Different people value different things. For flexible points to make sense, the flexible points program you earn rewards in must offer redemption options that are valuable to you.
Most flexible points programs are geared toward aspirational international travel awards booked through airline and hotel transfer partners. If you value the opportunity to fly in international business class cabins on the cheap or stay in luxury hotel suites abroad, flexible points are probably a good option.
Maybe business class international travel isn’t your thing. Many flexible points can be redeemed against airfares, hotels, cruises and car rentals booked through a travel portal. Depending on the program and credit card you hold, this can be a reasonable option to get more rewards from your credit cards.
While most flexible points programs offer the ability to redeem points for a variety of gift cards or the ability to pay with points at certain merchants, these redemption options usually offer relatively low redemption values. If redeeming for merchant gift cards is the most attractive option to you, you might be better off with a cash back credit card.
Which Credit Cards Offer the Most Rewards for Your Spending
On the flip side of redemptions, one factor to consider is where you do the majority of your spending and which credit cards’ reward programs offer the best value when paired with your spending patterns.
As a general rule, credit cards earning flexible points are geared more toward travelers and small businesses and offer more opportunities for higher earnings in specific categories like travel, hotels and office supplies while cash back-earning credit cards usually are geared toward general purchases, offering a flat-rate of cash back or bonus rewards in categories like groceries and gasoline.
When you are trying to make the call on whether to invest in a flexible rewards program, understanding which credit cards match with your spending patterns is a good first step. The Forbes Advisor list of the best credit cards and the Forbes Advisor credit card review for each card you’re considering can provide a helpful roadmap to understanding the various rewards credit cards available and are a good place to start.
Breakage—And Why It Matters
One of the reasons banks, hotels, airlines and others love points programs is breakage. Breakage is revenue that a company recognizes when things like gift cards and points are never redeemed. You may be thinking, “Why would anyone leave money on the table by not redeeming points?” but it happens all the time. According to a 2017 survey by Bankrate, almost 3 in 10 people never redeem their credit card rewards. And this doesn’t even touch on the people who occasionally do but leave some unredeemed.
The reason for this is simple: Redeeming points is not automatic and is often more complex than redeeming cash back. Further, most point redemptions require you to accumulate a certain number of points before you can redeem them and many people save their points in the hopes of cashing them for high-value redemptions.
By contrast, cash back is easier to redeem. While some cash back rewards programs may require you to accumulate a certain amount of cash back before they will issue a check or statement credit, some will allow you to redeem as little as one cent. Many cash back credit cards have an option to redeem your cash back rewards automatically. Putting your cash back rewards on autopilot can ensure that you never miss out on rewards.
Reward Value Variability
It is pretty easy to understand the value of cash. A $100 cash back reward is worth $100—no more, no less. In contrast, flexible points can be redeemed at a range of values that vary widely depending on the type of redemption, airline award prices and even the equivalent cash prices of airfares or hotel rooms.
That variability means that the value of your points isn’t guaranteed until you redeem them, but in that variability is the greatest upside in flexible points: The opportunity to redeem for outsized value. If you can redeem 26,500 Citi ThankYou points for a one-way business class flight using a KLM award flight promotion from Chicago to Lisbon, Portugal, you are getting value for my points well beyond the $265 I could get from the equivalent spending on a cash back credit card.
Understanding Your Strike Price
If you choose to earn points in a flexible rewards points program, you should develop a feel for what represents “reasonable value” to you. If you participate in a flexible points program, developing an idea of what is a “reasonable” value for your points can help you make the decision about whether to pay cash or redeem points for a reward. The value of flexible points is the value they have to you, not to anyone else.
The biggest downside to the variability of flexible points is the possibility that your preferred points currency is devalued. Devaluations can happen in many ways: A flexible points program may change the rules for transferring points to an airline. A partner with attractive redemption options may be dropped. An airline partner may increase its award prices. Points may suddenly become worth less toward travel booked through a portal. A redemption option may disappear altogether.
The longer you hold points in a transferable points program, the more risk you have of some sort of devaluation. Devaluations often happen with little or no notice and are not predictable.
How Much Effort Does it Take to Redeem Your Rewards
Learning the Program
Learning to use cash back is easy. With cash back rewards, often the only thing you only have to learn is how to redeem your rewards through your bank’s website and what options are available. Usually these options will be some combination of a credit toward past purchases, a statement credit, a cash back check or a deposit to your bank account.
In contrast, the many redemption options available in flexible point programs mean that you will usually want to spend time learning about how your flexible points program works. To effectively use flexible points, you’ll need to learn what the points can be redeemed for and how to redeem them. Often, you will redeem points through a portal on a bank website, but there may be some rewards that require you to visit a third party website or call a call center. For redemption options like point transfers, it is good to understand when points post in your airline or hotel account.
Learning the Program’s Partners
Because outsized rewards value often comes from transferring points to partners and then redeeming those transferred points for awards, getting outsized value from your points requires learning not only your credit card’s flexible points program, but one or several partner programs as well. The need to learn how to use additional programs adds a layer of complexity to redeeming points that may not be attractive, especially if you only redeem points occasionally.
As an example, Avianca LifeMiles is a program that can offer fantastic value for business class awards on Star Alliance, and is a transfer partner of both the Citi ThankYou Points program and American Express Membership Rewards. Learning this program can provide fantastic opportunities for maximizing the value of your transferable points, but anyone reading up on the program for the first time may be overwhelmed by the process of actually redeeming miles.
There is a way around learning the program rules though. Award booking services exist to help you find the most valuable redemptions using transferable miles and points. For a fee, these services can help you redeem your flexible points for complicated or hard-to-book travel awards. If you don’t want to entirely outsource your rewards, you can use a number of tools to assist you in booking your own awards.
At the end of the day, whether you pursue cash back, flexible point rewards or some combination of both is a decision that you must make by weighing your situation, what rewards you value, and how much effort you are willing to put toward redeeming rewards.
As a quick reference, the table below can help you when you are making this decision:
High—Cash is the most flexible reward
Moderate—Rewards are usually geared toward travel
Moderate—Cash back cards exist that earn bonuses in categories or high 2% cash back on all purchases
High—Flexible point credit cards often offer more opportunities for higher earnings in specific spending categories
Low—Cash back has a fixed value
High—Incredible value out of aspirational rewards
Low—Cash back has a fixed value
Moderate—Devaluations and breakage are the biggest downsides. Downside can be limited by cash-equivalent redemption options
Low—Cash back redemptions are simple and straightforward
Moderate to High—Redeeming points for the most attractive rewards often requires investing time into learning programs
of whether you choose to pursue cash back, flexible rewards or some combination of both, remember that at the end of the day, the rewards that you use and enjoy will be the best ones for you. Whether that’s increasing your savings to the end of retiring faster, taking your family on vacation or experiencing the joy of flying across the ocean in a lie-flat bed, the choice is up to you.