Cash Back vs Rewards Points In Credit Card

01^st Jan 2025...

Choosing between cash back and reward points on credit cards can be confusing. Both options have their perks, but the best choice depends on how you spend and what you value from your spending.

This blog will take you through the key features of cashback and reward points, helping you decide which option aligns better with your financial habits and goals.

Understanding cash back & reward points

Before we compare the two, let's define what each means:

Cash Back in credit cards: This means earning money back on your purchases, which gets credited to your account or deducted from your statement balance.
Reward Points in credit cards: These are points you accumulate per spend which you can redeem for various rewards like travel, merchandise, gift cards, or even cash in some cases.
Immediate vs. Accumulative benefits: Cashback gives you immediate value back on purchases, typically seen in the next billing cycle. In contrast, reward points accumulate over time and can be saved to redeem for larger or more significant rewards.
Earnings potential: Cashback programs offer a fixed percentage back on purchases. reward points, however, may vary in value depending on how and where they are redeemed, with the potential to maximise value through strategic redemptions.
Flexibility in usage: Cashback is generally very flexible, with no restrictions on how you use the money once it's been earned. reward points may offer more redemption options, but these are confined to the specific partnerships or offers outlined by the credit card company.

How does cash back in credit card work?

Cashback in credit cards operates on a simple principle: spend money and receive a percentage of that expenditure back. This straightforward approach can be quite appealing for several reasons.

Ease of use: Cashback is simple and direct. For example, spend Rs. 100, and earn back a certain amount. No points conversions are needed.
Immediate returns: You see the benefits quickly, usually applied to your account monthly.
No hassle with redemption: Unlike points, cashback doesn’t require going through catalogues or redemption portals.
Predictability: Cashback provides a predictable benefit you can count on, which can be especially useful for budgeting. Knowing exactly how much you'll get back each month simplifies financial planning.
Universal appeal: Cashback offers a tangible and consistent value proposition unlike points, which can vary based on what you redeem them for.
Low maintenance: Cashback programs require less management and oversight than points programs. There's no need to track point expirations or changes in redemption values, making it a low-effort benefit that fits easily into your life.

How reward points in credit card work?

Reward points in credit cards can be more complex but offer potentially higher value. Here's how they stack up:

Variety of rewards: Redeem points for travel, products, or experiences. Some cards even offer point boosts for certain categories like dining or travel.
Potential for greater value: Points can sometimes be more valuable for options like flights or hotel stays, especially if you know how to maximise point redemption strategies.
Flexibility in redemption: Many cards offer multiple redemption options, giving you the freedom to choose how you use your points.
Strategic redemptions: Plan your redemptions around bonus offers or special promotions where points might have increased value.
Point transfers: Some cards allow you to transfer points to airline or hotel loyalty programs, where they may have a higher value than if redeemed directly through the credit card’s reward portal.

Comparing cash back & reward points

Deciding between cash back and reward points isn't just about what each offers—it's about matching those benefits to your spending habits, preferences, and financial goals.

Spending habits: Look at where you spend the most. If you dine out or lot or travel, a reward card might offer more value. For broad spending, cashback could be better.
Personal preferences: Do you prefer immediate monetary rewards or saving points for a big trip or purchase? These preferences will help you choose between the two options more efficiently.
Financial goals: Consider whether immediate cashback can help with monthly budgeting, or if accumulating points aligns with longer-term goals.
Reward flexibility vs. simplicity: Reward points often offer flexible redemption options, which can be ideal if you enjoy adapting how you redeem your points based on the most valuable options. Cashback is simpler, providing a straightforward monetary benefit without the need to strategise about redemptions.
Earning potential: Evaluate how much you could earn from either option based on your regular spending. Some reward cards offer escalating rewards for higher spending, which might tip the balance if you’re a big spender.

Making the most of your card through practical tips & strategies

Whether you choose cashback or reward points, here’s how to maximise your benefits:

Understand the reward structure: Know how much cash back or how many points you’ll earn per spending.
Look for bonus categories: Some cards offer higher cash back or extra points for certain categories like groceries or fuel.
Be aware of caps and expirations: Some cashback cards cap the amount you can earn, and some points expire after a certain period.
Optimise your payments: Time your large purchases or bill payments to maximise the reward during promotional periods or within bonus categories.
Stay informed: Keep up-to-date with your credit card’s terms and any changes to reward structures. Credit card issuers occasionally update reward programs, which can affect how beneficial your current strategies are.

Conclusion

The choice between cashback and reward points does not provide a one-size-fits-all answer. Whether you opt for cashback or reward points depends on your spending habits and financial goals. Understanding the benefits of each and aligning them with your lifestyle will help you make the most of your credit card, turning every transaction into a rewarding experience.

Whether getting a little money back each month or saving up for a dream trip, the right credit card can make managing your finances rewarding and enjoyable.

FAQs

1. Which is better for everyday use, cashback or reward points?

If you value simplicity and immediate returns, cashback is ideal for everyday purchases. For those who spend in specific categories, reward points might offer more.

2. Can reward points ever convert to cash?

Yes, some credit cards allow you to convert reward points into cash, though the conversion rate might not be as high as redeeming for travel or goods.

3. What should I watch out for with cashback cards?

Be aware of any caps on how much cash back you can earn and whether your cash back expires.

4. Are there credit cards that offer both cashback and reward points?

Yes, some cards offer a combination of both, providing flexibility in how you earn and redeem your reward.

5. How do I decide between cashback and reward points?

Consider your spending habits, what kind of reward you’ll use, and how much effort you want to put into managing your reward.