Which is right for you? A card that dishes out rewards such as golfing privileges or dining discounts or a card that gives you cash in return for your spending?
Putting all your spending on a credit card sounds a little risky. But if you choose the right deal – and use the card in the right way – it can be financially rewarding. However, choosing a card from the vast selection of enticing options on is difficult.
The first step, therefore, is to understand the difference between the two types of card. While cashback credit cards give you money back based on how much you spend on the card, reward-based cards offer you benefits in return for your spending. This could be air miles to redeem against flights, loyalty points that can be redeemed on retail products or instant benefits such as golfing privileges, airport lounge or health club access, shopping and dining discounts.
The benefit of a cashback card is that you know exactly what you are getting in return for your spend (i.e. a lump sum of cash) and you can spend that money anywhere. Reward-based cards, on the other hand, are useful for those that want to earn on things that tie in with their hobbies such as air miles for keen travelers or free merchandise for football lovers.
The next step is to decide which type of card is for you. Below are five factors to consider when choosing between the two types of card:
Decide what you want
The simple way to choose between a cashback or rewards card is to realize what is important to your lifestyle. If golf is your number one priority, then pick a rewards card that offers free rounds and discounts at the clubhouse.
If shopping is your passion, then it may be worth earning cashback on those spends – money that can be used to spend on more items further down the line.
Is it worth it?
The offers are enticing but there’s no point taking on a card if you don’t assess exactly what you receive in return for your spending. So do a mathematical evaluation of each scheme to pick the real winners.
If a rewards card offers air miles, for example, find out what the earning to burning ratio is. Travel reward cards are marketed with terms such as “earn 1 air mile for every $1.5spent”. To really assess how good it is, you need to research the redemption rate by calculating how much you need to spend to gain a free flight. If two cards offer one mile per $1 spent, but one loyalty program requires 42,000 miles to travel to London and another 60,000 miles for the same trip, then it’s easy to see which card is best.
Cashback cards generally target a specific category such as spending on utility bills, at retail stores or at the supermarket. It can also offer money back on flights or holiday bookings and this is where you need to do a quick calculation. If a card’s cashback won’t cover the cost of a flight, an air miles card might be a better alternative.
Use it or lose it
Whichever type of card you choose, make sure you actually use it as you only earn rewards or cashback when you spend. So, rather than using cash, cheques or debit cards for your everyday spending, load the card up with grocery shopping or monthly work expenses. It can be a powerful way to earn more at no cost to you, provided you can cope with paying the bill in full each month.
For reward cards, the rewards will often be capped. For example, some travel reward cards cap the amount of air miles you can earn e.g. 4,000 air miles for every $1,500 spent or 6,000 miles for every $4,370 spent. If you spend less than $1,500 you earn nothing. Or there may be a limit on the number of golf games you can play at your chosen club.
For cashback cards, there is generally a monthly cap on how much you can receive in each category e.g. a maximum of $300 cashback on any utility spends, or a maximum of $1000 on supermarket spends. Also, while the advertisement might say you will receive 5% cashback, that figure is usually part of a tiered scheme i.e. the cashback you will receive will be around 1% or 2% until you spend over a certain amount, say $1,000. Be aware that some credit cards take away your right to earn cash back if you make late payments or go over your credit limit.
Don’t be dazzled by the rewards and ignore the fees involved. Many cards come with hefty annual fees so if those fees are higher than the value of the rewards or cashback you get in return, then the card is not worth it.
It’s also important to know the interest rate of your selected card because if you don’t pay the card off, you will accrue interest on that unpaid balance. And this is key for both types of card – there’s no point accruing air miles or reward points if you build up lots of debt at the same time.
[Also read: The lowdown on airmiles-linked credit cards]