Credit card rewards come in many forms — including cash, points, miles, and statement credits — but if you have a good credit score and your rewards are not worth at least 2 cents on the dollar, you’re leaving money on the table on every single purchase.
The 2% Minimum
Where does that baseline rebate of 2% come from? There are four credit cards on the market that effectively yield 2% cash back on all purchases: the Priceline Rewards Visa card (no annual fee), the Capital One Venture Card, the Barclays Arrival World Mastercard, and the Fidelity Investment Awards American Express Card (no annual fee).
UPDATE: The 2% cash-back version of the Priceline Rewards Visa card is no longer available.
Each card has its pros and cons (click here for more information), but each effectively provides a 2% cash or cash-equivalent kickback on all purchases. To be sure, there are cards with rotating “bonus” categories that may outdo this these cards for certain types of spending (for instance, the Blue Cash Preferred Card from American Express pays a whopping 6% cash back on groceries), but 2% is the rebate that I know I can get consistently on all purchases.
Exceeding The 2% Minimum
If you’re willing to trade off the flexibility of cash, you can achieve more value (and often significantly more value) with points and miles-based cards, like the Starwood Preferred Guest Card from American Express or the Chase Sapphire Preferred Card.
The Starwood Preferred Guest Card (see detailed review here), for example, earns 1 “Starpoint” for each dollar spent on the card, and those Starpoints are extremely valuable when redeemed for free stays at any of Starwood’s high-end resorts (including St. Regis, W, and Westin properties), or can be transferred to a host of frequent flyer programs. For my upcoming honeymoon, my fiancee and I booked five nights the St. Regis in Kauai, Hawaii. We’re using 80,000 Starpoints — 20,000 points per night for the first four nights, and the fifth night of a stay is always free when redeeming points at Starwood resorts. The same room, for the same five nights, if booked at the lowest available non-refundable rate, would be well out-of-budget at over $3,570 ($630/night plus tax)! So, on this booking, we’re netting about 4.5 cents per point: more than twice the 2% cash baseline. Plus, there’s the additional (and significant) benefit that nights booked with Starpoints are typically fully refundable until three days prior to check-in.
The Chase Sapphire Preferred card (see detailed review here) earns 2 “Ultimate Rewards” points per dollar on all travel and dining purchases, and those points are instantly transferable to transferable to several loyalty programs — United Airlines, Korean Air, British Airways, Southwest, Hyatt, Marriott, Priority Club, and Amtrak. On a recent ski trip to Park City, Utah, I redeemed 15,000 points per night at the ski-in/ski-out Hyatt Escala Lodge, which would have otherwise cost about $390 per night — netting about 2.6 cents per point, or 5.2 cents per dollar spent in the expansive “2x” travel and dining categories.
The Bottom Line
I know too many people with great credit scores and awful credit cards, and if you fit into this category, you are literally passing up free money on every purchase. You’re paying 100% of the list price on everything you purchase when you could and should be paying 98% or less.
The choice between a cash or cash-equivalent rewards card on the one hand, or a points or miles-based rewards card on the other, boils down to personal preference. I consider cash-back cards to represent a more conservative approach, best suited for infrequent or “no-frills” travelers who prefer not to be tied to specific loyalty programs or restricted by limited inventory (though so-called “blackout dates” are really only an issue for airlines miles, as most hotel programs have moved to a no-blackout model where, if there’s a room available to a cash-paying customer, it is also available for point redemption). Points and miles cards are best-suited for people who, like me, are more amenable to trading off the flexibility of cash to extract maximum value for each dollar they spend.
Both approaches make a whole lot of sense. But, assuming you can afford to pay your monthly balances on time, paying with cash, a debit card, or sub-par credit card simply doesn’t.