Last week, I wrote an article on strategies for maximizing the benefit of travel credit card rewards, and I concluded with these sentences:

A final tip: rather than thinking about what you might do in the future, think only about what you’ve done in the past or what you’ve strongly committed to doing going forward.

For example, if you rarely travel but have a vague notion about traveling more, don’t get a travel rewards card quite yet. Instead, use a different rewards card and see if your travel actually increases in the next year or two.

If you’ve vaguely thought about a Disney vacation, don’t jump on board with a Disney rewards card yet. Instead, use a different rewards card and see if that plan starts to turn into something concrete, and then switch to the card when you start to think about actual dates and plans a year or two in the future.

If you do these things, you’ll get maximum benefits out of travel reward credit cards. Just remember the fundamentals: don’t use a credit card just to get rewards. Instead, use it as a tool to build credit and always avoid carrying a balance; consider the rewards program to merely be an extra perk for good behavior. Not sticking to that plan will cause the costs of the card to quickly exceed the benefits of the rewards.

This was my attempt to briefly answer a very fundamental question about credit card rewards programs: which program is the best? Which type of credit card rewards program is likely to get me the best bang for the buck? Let’s dig a little deeper into that question.

In general, the more flexible the program, the less dollar value the rewards will have.

If you want a single statement to follow in terms of credit card rewards, it’s this: the more ways in which you can use a credit card reward, the less of that reward you’re going to get for each dollar spent on that card.

This makes a lot of sense if you think about it. Cash will always have more value than a gift card to a particular business, because you can use cash anywhere whereas that gift card for that business can only be used at that business. Similarly, a gift card that can be used at a lot of places has more value than a gift card that can only be used at one business.

The same thing is true for credit card companies. Giving you cash is going to be more costly for them than giving you a gift card or a discount at one specific retailer, and giving you flexible rewards or points is going to be somewhere in between.

In general, most credit card rewards programs give you roughly the same total “value” for every dollar you spend on the card. Let’s see what that means in terms of actual rewards programs.

True “cash back” rewards are the most flexible, but tend to have the least value.

If a card is giving you “cash back” in the form of a discount on your bill or a check in the mail, that’s generally the most valuable reward they can give you in terms of face value. That’s literally dollars and cents directly leaving their pockets and going straight to yours.

Cash back rewards are the best for you in terms of flexibility, but they suffer in terms of value. Most of them offer rewards rates of 1% or 1.5% (and that 1.5% often comes with some restrictions), while other rewards cards will offer discounts or credit at a specific business (or group of businesses) at 3% or more — but then you’re tied to that business.

In general, if you’re not heavily tied to spending money at a small number of retailers, or if the retailers you mostly do business with don’t have rewards cards of their own, a cash back card is a really good option.

At the other extreme, cards tied to specific retailers give a ton of value — but they’re tied to just that retailer.

Many businesses offer Visas and Mastercards with the logo of their business boldly displayed on it and a rewards program heavily tied to using that retailer and using your rewards at that retailer.

For example, the Amazon Visa currently offers a 3% reward for all purchases made at Amazon (and somewhat smaller rewards for other purchases), but offers that reward in the form of credit on your Amazon account. Similarly, the Target Mastercard currently offers a 5% discount on all purchases made at Target using the Target card.

You can usually find rewards ranging from 3% to 5% in value on a rewards card tied to a specific business, but those rewards are usually given in terms of a discount at that business or require purchases from that business.

It is a bad strategy to change your shopping habits just to use a rewards credit card effectively. You should be shopping smart and using discount retailers and bargains where you can and credit card rewards should complement that.

Having said that, a rewards card tied to a specific retailer is a good idea if you use a particular retailer with high frequency.

Points programs occupy a middle ground — more valuable but less flexible than cash back, while also being less valuable but more flexible than cards tied to a specific retailer.

Most points programs live somewhere in the middle between these two extremes. They will often offer “points” at a rate of 2% to 3% of your purchases, but those points wind up in a program run by the credit card issuer. Within that program, those points can be exchanged for gift cards or discounts at other businesses that participate in the program, which may or may not be businesses that you use.

In general, points cards are worth considering if you can find one tied to a points program that works with multiple retailers that you use with some regularity.

The best program for you depends on you.

The best rewards program depends almost entirely on what your life is like and how you spend money.

If you have one or two businesses that you use extremely consistently, month in and month out, it is very likely that a rewards program tied to that retailer is going to give you the most value. That rewards card will usually either come in the form of a discount when you use it there or in the form of a gift card or credit at that retailer. The rate at which you earn those discounts and credits is usually notably higher than the rate at which you would earn cash back or points in a flexible program.

For example, if you buy things from Amazon all the time, an Amazon Visa card is probably going to produce a lot of value for you. If you shop at Sam’s Club and get gas there frequently, a Sam’s Club Mastercard is likely a solid choice.

If you consistently do business with a handful of businesses and several of them work through a particular points program, then that program is a good one for you. For example, if you travel a lot for work and both your preferred hotel chain and your preferred airline work with a particular credit card rewards program, then that program is probably going to give you a lot of value. You might get even more value with a card associated with just your airline or just your hotel depending on your exact travel situation; you’ll have to check.

For example, if you use JetBlue for most of your flights and consistently stay at Wyndham Hotels, you may want to consider the Capital One Venture card, which partners with both of those.

If you don’t buy consistently from any one business, a cash back rewards card is always a good option. It might not get you the most “bang for your buck,” but what it will give you is flexibility and the ability to avoid having your rewards tied to a specific business.

For example, the Capital One Quicksilver card currently offers you 1.5% cash back on all of your purchases. While that percentage is lower than cards tied to specific retailers, the rewards are incredibly flexible.

As always, rewards programs are only worth considering if you consistently pay your credit card bill in full and on time, which means that you are keeping your spending well within your means and only using a credit card as a tool to make buying easier. If you’re unable to do those things and find yourself carrying a balance on a rewards card or buying things you can’t really afford, the cost of those missteps will almost immediately devour the benefits of any rewards.

Good luck!

The post Cash Back, Points or Discounts? What’s the Best Type of Credit Card Rewards? appeared first on The Simple Dollar.



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