Reward Cards: Cash Versus Points


I was reading the One Mile At A Time blog, and after having won their photo contest, came across this post entitled “Is it time to rethink the cash back credit card?”.    The title perplexed me, as I love cash back cards. As I read the post, I got to contemplating the nature of cash back versus reward points.

The rational conclusion that the author reaches is that points are rarely worth more than 2%, the current cash back standard set by Schwab bank’s card.

Cash is better than getting something of lesser value for free, right?

This would seem to make sense, but it doesn’t.    Try this experiment, or make it a thought experiment if you are married.    Go to a bar, and give a stranger of the opposite sex five dollars.     I doubt that their reaction will be as favorable as if you had purchased him or her a four dollar beer.    That is because gifts have an intrinsic value that money does not.   When we redeem points or miles for free flight, we feel that we are getting a gift for our loyalty.     That we might value that gift greater than it’s actual value, or it’s opportunity cost is more rational than it sounds.

Let me give you another example.  Imagine you want to a birthday present for a friend, but you cannot decide what he wants for his  birthday.    You are tempted to give your friend cash and let him decide for himself, however, you realize that he likely to save the money or spend it on necessities.    The point of the gift is to make him happy, and ultimately you realize that can only be done by purchasing something that he would not have otherwise bought for himself.

Points and miles present the same dilemma when compared to cash back rewards.    A mere 2% cash back may be worth more than the points or miles, however it will ultimately be factored into your monthly payment, and you will see no direct, tangible reward.     I could give you a 10% cash back reward, and it will be about half  satisfying as a coupon to Bed Bath and Beyond.    On the other hand, earning miles towards a plane ticket to Hawaii is totally satisfying, even if the value of the plane ticket is less than the cash back you would have received.

At Least One Rational Reason Miles Beat Cash

One of the nice things about reward cards is that they often come with a hefty sign up bonus.   Needless, to say, cash back cards typically do not come with some free cash for signing up.    Some do, but it is often a mere $50.    On the other hand, my American Airlines CitiBank cards each offered 30,000 miles for a sign up bonus.      When you add in the sign up bonus to the miles earned from spending, miles and points cards can start to get competitive.

Another reason is that there actually are some rewards that are worth more than 2%.   My Starwood Amex gives me Starpoints that can easily be worth more than 2% when redeemed for hotel stays and even with just the right airline redemption.

Generally, The Advantage Goes To Cash

That said, cash has some major advantages.    Inflation aside, cash holds it’s value much better than miles or points.    These loyalty programs are always being devalued and can potentially be discontinued.   Even better, cash can earn interest, whereas I have yet to find a bank that takes StarPoints for a deposit.    Cash is supremely flexible, even more-so than a StarPoint.    I can redeem cash at any merchant, anywhere in the world, and can even pay my bills with it.

In the end, it is up to each person to weigh the rational and irrational arguments for themselves in the cash versus points debate.

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  1. Carnival of Personal Finance #218 – "Chuck Norris" Edition | Budgets Are Sexy Says:

    [...] Ask Mr Credit Card presents Rewards Card – Cash vs Points. [...]

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