Choosing between cash back and travel credit cards

Quick insights

• Choosing a credit card is a big decision, and there are pros and cons to both cash back and travel rewards credit cards.
• While cash back cards can be more valuable for everyday purchases, travel credit cards may offer additional benefits and perks, like travel insurance and lounge access.
• It’s important to review the benefits, terms and conditions of your card and evaluate your own lifestyle, spending habits and goals to find the card that’s the best fit for you.

There are many rewards credit cards available today, and each of them come with their own benefits. Before choosing a cash back or travel card, it can be helpful to examine your spending habits and travel goals to find the card that’s the best fit for you.

How to decide which type of card is right for you

Before looking at different cards, you might want to begin by evaluating your spending habits and lifestyle. Here are some key considerations when choosing to apply for a new credit card:

Expenses

If your expenditures are primarily on everyday items, a cash back card might be ideal, as it returns a percentage of spending directly to you. However, if you frequently spend on travel, a travel card could offer more perks, like miles or points that are redeemable for flights, hotels and other travel expenses.

Lifestyle

Assess your lifestyle and spending habits to determine if travel or everyday purchases would provide the greater rewards benefit.

• Frequent travelers might benefit more from travel cards, which can offer such perks as added rewards for travel purchases, no foreign transaction fee, airport lounge access and more. For example, a travel card might offer 5x points on airfare and hotel purchases, while a cash back card might be less likely to emphasize these travel-related spending categories.
• Some everyday spenders might prefer cash back cards that offer a flat earning rate, while others might benefit more from rotating category rewards credit cards. Flat-rate cards typically offer the same set rewards rates from month to month, while revolving or rotating rewards categories change every month or quarter, allowing you to strategically maximize spending and earning in certain categories.
  For example, a flat-rate card might offer a set 3% cash back earning rate at grocery stores and a 2% cash back earning rate on every other purchase, while a rotating bonus card might offer 5% earnings at gas stations in the first quarter of the year before switching to 5% at select online retailers the next quarter.
  

Goals

Reflect on your financial objectives. Are you aiming to maximize returns on everyday spending, or are you looking to save on travel costs? Cashback cards generally offer straightforward rewards on all purchases, making them suitable for general savings. However, travel cards often provide higher rewards rates for travel-related expenses and additional travel benefits.

Cost/benefit analysis

Evaluate the benefits each card offers in relation to annual fees, interest rates, sign-up bonuses and credit card benefits. Some factors you may want to consider include:

• Generally speaking, the more perks a credit card offers the greater the likelihood of an annual fee. Many travel credit cards offer significant travel perks, like lounge access and annual travel credits, but they may come with an annual fee.
• Cards that offer more significant benefits and rewards earning potential might require a higher credit score and longer credit history, which may make it more difficult to qualify.
• Review the sign-up bonuses of multiple credit cards to find the one that most benefits your needs and interests. Consider if a potential annual fee is worth the benefits available with the card. Someone who travels frequently might be more willing to pay a large annual fee in exchange for airport lounge access than someone who rarely flies.

Benefits analysis of cash back and travel credit cards

Next, let’s take a closer look at the typical benefits of cash back and travel credit cards.

Benefits of cash back credit cards

Cash back credit cards are appealing due to their simplicity and direct savings, which can effectively reduce the net cost of purchases you would already be making. Specific benefits include:

• Simplicity in rewards redemption: Cash back cards offer rewards that are easy to redeem. Unlike travel cards, which may require navigating more complex redemption options or have availability restrictions, cash back cards offer a certain percentage of cash back on purchases. These rewards can be applied directly to your statement, transferred to a bank account or redeemed for gift cards, providing clear and quick financial benefits.
• Flexibility in spending: With cash back cards, you earn rewards on all purchases, not just travel-related expenses. This makes them more versatile for everyday use, allowing you to earn rewards on everyday purchases without the restrictions often found in travel card reward categories. Cards with rotating bonus categories often offer higher cash back percentages. This may allow you to strategize your purchases to maximize rewards.
• Lower or no annual fees: Many cash back cards come with low or no annual fees, making them more accessible and cost-effective for a broader range of users. In contrast, many travel cards may charge higher annual fees to have the ability to offer more travel perks, which you may not find worthwhile if you don't travel frequently.
• Fewer concerns about point valuation: The value of cash back typically doesn't change, whereas the value of travel points may vary depending on what or how you redeem them. This may make cash back cards a more reliable choice for long-term rewards planning.
• Universal appeal and utility: Cash back cards are universally beneficial because they may offer redemption options such as statement credits or cash back. Travel cards, while valuable for frequent travelers, may offer benefits that are irrelevant to those who travel infrequently, making cash back cards a more universally practical option.

Benefits of travel credit cards

Travel credit cards offer many benefits that can make them more appealing than cash back cards, especially for frequent travelers. These benefits may include:

• Higher reward rates for travel-related purchases: Travel cards often provide higher rewards rates for expenses related to travel, such as flights, hotels and car rentals. This can lead to savings for frequent travelers, making these cards particularly valuable for those who spend a lot on travel. Essentially, the more you use your card for travel, the more points you can earn for future travel.
• Valuable travel-specific perks: Many travel cards offer perks that enhance the travel experience, such as complimentary airport lounge access, free checked bags, priority boarding, travel insurance and more. These benefits can help increase comfort and convenience during travel, potentially saving money on each trip.
• Potential for large sign-up bonuses: Travel cards frequently offer substantial sign-up bonuses that can be worth several hundred dollars or more in travel credits, points or miles. For example, a travel card may offer a sign up bonus that could be used to redeem for roundtrip flights or hotel stays.
• Less likely to have foreign transaction fees: Many travel cards do not charge foreign transaction fees, which are typically around 3% with other cards. This makes them ideal for international travelers, providing savings on purchases made abroad.
• Partner transfer: Travel cards often have partnerships with airlines and hotel chains, allowing cardholders to earn points through loyalty programs. This can maximize the value of points and open up more travel opportunities.

Maximizing the benefits of your chosen credit card

 It is possible to spend strategically to maximize the earning potential and benefits of your credit card. Let’s review how in more detail below.

Strategies to maximize cash back rewards

There are a number of ways to make the most of a cash back credit card. Using your cash back card for all possible purchases can help you maximize rewards, although it can be important to keep track of your spending to avoid buying more on a credit card than you would have without one. If applicable, pay attention to rotating rewards categories that offer higher cash back percentages. Try to pay off your balance on time and, when possible, in full, to help avoid interest charges that could negate the benefits of rewards.

You can also consider combining your cash back card with other rewards programs for double-dipping on points. For instance, you can use a cash back card that offers high returns on grocery store purchases in conjunction with a supermarket loyalty program that provides its own points or discounts. This strategy may allow you to earn cash back from your credit card while simultaneously accumulating loyalty points that can be redeemed for further discounts or free products at the store.

Strategies to maximize travel rewards

To effectively maximize travel rewards, it's important to concentrate your spending on your travel credit card, especially in categories with higher rewards earning. For example, if your travel card offers triple points on travel and dining, consistently using it for these categories can help boost your points balance.

Consider setting up automatic payments for monthly bills like phone services or subscriptions with your travel card to further increase point accumulation. By using this card for all possible purchases, you can accumulate points or miles more quickly.

You can also consider transferring your accumulated points to airline or hotel loyalty programs, which you could then redeem for flights, flight upgrades, hotel stays or more.

Another key strategy you can capitalize on is the sign-up bonuses that many travel cards offer. These bonuses can be rewarding, often providing enough points or miles for domestic flights or a night or two toward a hotel stay. To ensure you receive these bonuses, be aware of any spending thresholds that need to be met within a specific time frame after opening the account.

Beyond the sign-up incentives, always use your travel card for booking flights, hotels and rental cars to not only earn more points but also to take advantage of additional protections that may come with your card, such as travel insurance, baggage delay insurance, rental car collision damage waivers and more. 

Understanding the fine print of reward credit cards

Every credit card comes with a list of terms and conditions—the “fine print” that explains important aspects like interest rates, annual fees, late payment fees and more. Travel and cash back cards are no exception. It’s important to read and understand the terms and conditions of your card to understand how it works and the costs associated with it.

In addition to the typical terms associated with every credit card, rewards cards include other considerations that you should familiarize yourself with. For instance, you should understand the redemption process, expiration policies and potential limitations or blackout dates for using your rewards or cash back. It is also helpful to familiarize yourself with benefits and protections offered by the card, such as purchase protection or travel insurance.

Bottom line   

Choosing a new credit card is a big decision that can be aided by a little research ahead of time. By carefully considering factors such as annual fees and earning categories, as well as understanding the specific benefits and drawbacks of each type of card, you can make an informed decision that aligns with your financial habits and goals. This approach can help you choose a credit card that not only offers great rewards but also enhances your overall financial health.