While chatting with a friend recently, she shared that she didn’t bother with miles and points, instead opting for 1 percent cash back from her credit card. Depending on how much you spend, 1 percent cash back can add up quickly — but she was missing out on something much more valuable.
It’s easy to put a value on a dollar, but not quite so simple to put a value on an airline mile or credit card point. This challenge has led many people to blindly choose a cash back credit card, even when that card is not the best option for their needs.
Below, we’ll take a look at cash back vs. points, and help you choose which option makes the most sense for you.
The value of cash back
The majority of cash back credit cards pay around 1 percent back on all purchases. If you spend $100, you get $1 back. If you spend $1,000, you get $10 back.
Some of the more valuable cards, like the Chase Freedom, offer a bit more. Freedom offers 5 percent cash back on rotating categories, but that is limited to $1,500 in combined purchases each quarter. Alternatively, the Fidelity Rewards Visa Signature card offers a flat 2 percent cash back on all purchases.
If you spend about $3,000 per month between groceries, shopping, entertainment, utilities, and other eligible purchases, a 1 percent cash back offer would net you $360 per year. With a 2 percent card, that’s $720 per year. Not chump change, but can you do better?
What are airline miles worth?
We know what a dollar is worth. In the cash back vs. points debate, what are airline miles worth?
Chase Ultimate Rewards points are a popular method to earn miles and points since there are several cards that can generate them and they can be used in several ways.
You can earn Ultimate Rewards points with the Chase Sapphire cards, Ink Plus, and even the Chase Freedom card if you also have an open Sapphire Preferred, Sapphire Reserve, or Ink Plus card in the same Chase user account.
Ultimate Rewards points can be redeemed in the following ways:
- Cash back: One point equals one cent. This is essentially equivalent to 1 percent cash back.
- Book travel through the Ultimate Rewards portal: Booking travel through the portal yields a 25 percent bonus over cash back, making each point worth 1.25 cents.
- Transfer to a partner hotel or airline: Chase Ultimate Rewards offers a stable of transfer partners with a 1:1 point transfer ratio. By transferring to partners, each point can be worth up to around 5 cents.
Did that last bullet get your attention? Booking travel through a partner can yield a value five times better than cash back. Here’s how it works.
Let’s say you have a Chase Sapphire Preferred card, which earns 2 points per dollar spent on travel and dining, and 1 point elsewhere. You have accumulated 140,000 points, thanks to the 50,000 point signup bonus and your regular spending over time.
You can turn that into $1,400 cash back, $1,750 in travel booked through the Ultimate Rewards portal, or transfer the points to a travel partner. It’s true that $1,400 is a lot of money and $1,750 is enough for an international coach plane ticket to many destinations — but we can do better.
A quick search at transfer partner United Airlines shows that for 140,000 points (plus $263 in taxes and fees), you can book a round-trip business class ticket from Los Angeles to London.
Paying cash for the same exact ticket would cost a heck of a lot more — $6,088.76, to be precise.
Taking out the taxes and fees, paying cash for this plane ticket costs $5,826 more out-of-pocket than booking with miles. Some quick math gives us the value of each mile:
$5,826 / 140,000 = 4.16 cents
Clearly, in this case, points are worth more than dollars.
Keep in mind that you can book a coach flight to Europe for around 50,000 points, so if you have saved up 140,000 points you’re not far away from three round-trip flights to Europe (or six domestic round-trip flights).
Using an estimated $1,500 to $2,000 price tag on a coach ticket to Europe, that makes 150,000 points worth $4,500 to $6,000 — still a lot more than $1,500 cash back.
You can do similar comparisons with other cards popular with travel hackers. You can also earn miles and points directly with your favorite airline or hotel chain using its specific branded credit card.
Cash back vs. points
If you’re not interested in traveling, going after points and miles won’t be worth all that much to you. However, if you want to see the world, miles and points can get you there at a much lower out-of-pocket cost than paying full-price for each plane ticket and hotel room.
If you want to travel regularly, you’re much better off with a miles or points travel rewards card than paying cash. Just don’t get caught up in a debt trap by spending more because of your travel rewards credit cards. Stick to your budget and only spend what you would have anyway while earning miles and points for travel.
Everyone has different spending, debt, and travel habits, so there is no right or wrong answer. But if you love to travel, it’s easy to see how the math works out in your favor when you choose miles and points over cash back. Your next vacation could be just a few swipes away.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Get real rates from up to 4 Lenders at once
Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Laurel Road.
Laurel Road Disclosures
2 Important Disclosures for SoFi.
3 Important Disclosures for CommonBond.
4 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.57% – 5.87%||Undergrad & Graduate||Visit Earnest|
|2.80% – 6.38%1||Undergrad & Graduate||Visit Laurel Road|
|2.48% – 7.52%2||Undergrad & Graduate||Visit SoFi|
|2.47% – 7.99%||Undergrad & Graduate||Visit Lendkey|
|2.57% – 6.65%3||Undergrad & Graduate||Visit CommonBond|
|2.72% – 8.17%4||Undergrad & Graduate||Visit Citizens|