Credit

Getting Started: Part 1 – Choosing Cash Back vs. Travel Rewards

The getting started series is a 7 part series in which we’re going to take you from a complete credit newcomer to grizzled veteran. Okay, maybe you won’t be a veteran after having read this series, but you will come away with the tools and information necessary to allow you to earn points and miles that you can redeem in a multitude of ways.

Setting Goals

I’ve always been a very goal orientated person so for me this part has always come relatively easy. If you’re not the same way, fear not, these goals tend to be easier to set and achieve than say “lose 50 pounds” or “read a book a week”. Rather, these goals are really the things that you hope to achieve once you start to sign up for, and spend money on rewards credit cards. You see, it is very important that before you ever sign up for a new card, or spend money on one that you understand where you want to go. I don’t necessarily mean that in a philosophical sense, but quite literally, where do you want to take yourself and possibly your family once you’ve started to earn points and miles on rewards credit cards? Later on in this series we will discuss how to maximize redemptions and you’ll be in a much better place when that time comes if you planned ahead.

Cash Back vs. Travel Rewards

The first thing you’ll have to decide is whether or not you want to earn cash back or travel rewards as the result of your credit card spend. I generally recommend that you choose one or the other as that will allow you to really maximize the amount of value you can derive from your spend.  While in some cases you can redeem “travel rewards” for things like gift cards or merchandise the value of such redemptions tends to be considerably lower than if you had used those points for travel only.

With cash back rewards you can generally earn anywhere from 1% all the way up to 5 and 6% back on your spend depending upon the category in which you’re spending. Categories are things like; restaurants, movie theaters, department stores, etc. Below i’ve listed some credit cards to give you an idea of the type of cash back rewards you could earn should you choose to go this route.

Name Base Cash Back % Maximum Cash Back % Annual Fee
Citi® Double Cash Card 1% 2% $0
Chase Freedom 1% 5% $0
Chase Freedom Unlimited 1.5% 1.5% $0
Blue Cash Preferred® Card from American Express 1% 6% $95

While this represents just a sampling of the available cash back rewards credit cards, you can see at a high level the type of cash back you can expect when you have some combination of these cards in your wallet. Lets play with the numbers to see the type of rewards you can expect from having a subset of these cards. For the sake of this example we will make the following assumptions:

  • $30,000 spend in a calendar year broken down by
    • $5,000 spent at US supermarkets
    • $5,000 spent on Freedom bonus categories
    • $20,000 non-bonus spend
  • You’ve got the Citi Double Cash, Chase Freedom, and Amex Blue Cash Preferred in your wallet
  • You will pay all of your bills in full, thus you will not pay any interest
Spend Card Used Earnings
$5,000 at US Supermarkets  Blue Cash Preferred® Card from American Express $300
$5,000 on Freedom bonus categories Chase Freedom $250
$20,000 non-bonus spend Citi Double Cash Card $400
$30,000 total spend See Above $855 ($950 in total cash back less $95 in fees)

In this example we’ve managed to earn over $800 in cash back through our daily spend, and of course this does not take into account any sort of sign-up bonus that you may’ve earned after you signed up for the card. This is a contrived example of course, chances are you spending will not fall as nicely into these buckets as has been demonstrated. The point however is that this is the kind of calculation you should be doing when you’re setting your goals and trying to decide which credit cards are going to best enable you to reach them.

Travel Rewards

Let us now turn our attention to the types of travel rewards that you can earn when you spend the same amount of money but you do so with some of the top travel rewards cards in your wallet. For the sake of simplicity we will make the following assumptions:

  • $30,000 spend in a calendar year broken down by
    • $6,000 spent on travel
    • $6,000 spend on restaurants and dining
    • $5,000 spend on Freedom bonus categories
    • $13,000 non-bonus spend
  • You will pay off all of your bills in full
  • You’ve got the Chase Sapphire Preferred, Freedom, and Freedom unlimited in your wallet
Spend Card Used Earnings
$6,000 on travel  Chase Sapphire Preferred $120
$6,000 on restaurants and dining  Chase Sapphire Preferred $120
$5,000 on Freedom bonus categories Chase Freedom $250
$13,000 non-bonus spend Chase Freedom Unlimited $195
$30,000 total spend See Above $932.50 ($1,027.50 in travel rewards at a value of 1.5 cents per point less $95 in annual fees)

Note: For the sake of simplicity, in our travel example we only used Chase cards to illustrate your potential earnings. While the Freedom/Sapphire/Freedom Unlimited does make for a great combination you may be able to earn greater rewards with other cards depending on your specific goals. 

 

In the case of the travel rewards we multiplied your total earnings by 1.5 which is a conservative estimate for the value you may be able to derive from your points, in this case Ultimate Rewards. The assumption thats being made is essentially that you will combine the points from your Freedom cards into your Sapphire and then transfer the points from your Sapphire to a partner such as Marriot, Southwest, United, Singapore, etc. Once you’ve done that, you’ve got a good chance of redeeming them for an average of 1.5 cents per point.

 

Conclusion

Hopefully this gives you something to think about as you begin to plot your course towards maximizing your daily spend and ultimately redeeming for some awesome rewards. While I personally tend to focus more on travel rewards there is nothing wrong with some good ol’ fashioned cash back.

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