Which credit card is right for you?

Warm or cold weather? Salty or sweet snacks? Coke or Pepsi? Credit card points or cash back? All these topics can spark debates on which is the best. In this article, I am going to compare the different credit card reward options and give you information to determine the optimal use for your personal situation. 

Cash Back Credit Cards

There are two main types of cash back credit cards – flat-rate cards and category-based cards. Flat-rate cards offer a simple cash back percentage, usually 2%, on all purchases with no category restrictions or limitations. Category-based cards come in many different forms but normally have set percentages for certain types of spending. These cards, most of which have no annual fee, are a relatively easy way to get an instant return on your everyday purchases in a simple and cost-effective way. 

The Fidelity Rewards Visa Card, for example, is a flat 2% cash back card with no caps or limitations. The card allows you to deposit your reward points directly into eligible Fidelity accounts. I personally use this card for most of my spending to effortlessly increase the size of my investment account over time.

An example of a category-based cash back card is the Costco Anywhere Visa Credit Card. This card offers 5% cash back on gas at Costco, 4% cash back on other gas stations and EV charging, 3% cash back on restaurants and Costco Travel, 2% cash back at Costco, and 1% cash back on all other purchases.

Another type of category-based card is a rotating category card, which offers elevated cash back rewards for certain categories of spending during specific times of the year. The Chase Freedom Flex Credit Card offers 5% cash back on up to $1,500 a quarter on rotating quarterly categories. For this quarter, the 5% category is grocery stores, but other common categories include restaurants, gas stations, or Amazon. Aside from this revolving category, the card also offers 3% cash back at restaurants and drugstores, and 1% cash back on all other purchases. 

While these cards are simple to use, they typically offer lower reward percentages than some point-based cards and there are little opportunities for earning outsized value like there are with travel point redemptions.

Points Credit Cards

Some credit cards earn points (such as 3x points per dollar) as opposed to cash back. These points can be redeemed for cash back, but more often are used for travel. There are credit card ecosystems that earn transferrable points (such as Chase Ultimate Rewards points and American Express Membership Reward points) or co-branded programs like cards that specifically earn reward points for companies like World of Hyatt or Hilton Hotels. 

This is where the fun begins for some people. You can maximize the value of your points and with some effort can redeem the points for outsized value. As an example, let’s say you use your American Express Gold Card to earn 4x Membership Rewards points per dollar on your $25k of groceries spending throughout the year. This would equate to 100,000 points, which could then be transferred to your Hilton Honors account at a 1 to 2 ratio for 200,000 Hilton Honors points. For 170,000 total points, you could stay at the Hilton Hotel in Times Square, New York City for a Friday-Sunday stay during December. The cash value of this redemption is $1,678, meaning that your original American Express points were redeemed for about 2 cents per points in the end. This boosts your 4x points that you earned on your grocery spending to an effective 8x back. For more information on this type of redemption, I recommend visiting The Points Guy blog or doing a search on YouTube. 

The above example highlights both the advantages and disadvantages of using points. You can maximize your reward redemption for outsized value and with certain travel cards be awarded access to airport lounges and hotel upgrades, but it comes with a time cost. It is much more complex to use and not as flexible as cash back, the travel portals are often difficult to navigate, and there is also a risk with your points being devalued by the issuers. Another disadvantage is availability “blackouts” during in-demand times of the year for travel, such as the summertime weekends and certain holidays. On these occasions, you cannot use points to book a stay.

Which should you choose?

Individuals who prefer simplicity and guaranteed value and are not frequent travelers probably should opt for cash back credit cards. There is something to be said about an instant “coupon” on your everyday spending by using something like a flat-rate 2% cash back credit card. And remember, you can always use your cash back for travel if you want – these redemptions are flexible. 

For those that are frequent travelers, playing the game of credit card reward points can be very beneficial and allow for some amazing travel opportunities. You must be willing to be flexible with your travel and research the best ways to use your points. Ralph published a blog article in 2021 that highlighted a client of ours who is an expert at playing the credit card game. 

Of course, these rewards are negated by record-high credit card interest rates. If you find yourself carrying a balance on your cards or overspending to reach point thresholds, the rewards are received in vain. Even 5% cash back is easily wiped out by the average credit card rate of over 24% (data from Investopedia). We only recommend using credit cards for spending when you are able to pay-off the balance in full each month.I recommend evaluating what needs you wish to fulfill to find the credit card strategy that best fits your lifestyle. You may even find that a mixture of both strategies is right for you. Please let us know if you would like to discuss these strategies in more detail.

Jake Spradlin, CFP®

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