Rewards vs. Cash Back: How to Choose a Credit Card for Your Needs

Choosing a credit card can be tricky, overwhelming, and tedious. You may be receiving constant advertisements for credit cards promoting the best rates, rewards, or benefits, but you're not sure which one is right for you. While a credit card is not for everyone, there are some benefits to having one for certain purchases. One of the most important things to consider when choosing is to look at a card's rewards or cash back programs. In this blog, we'll dive in to see how you can decide which option is right for your financial journey.

What Are The Main Differences Between Rewards and Cash Back Credit Cards?

Before we discuss how to make your decision, it's important that you have a basic understanding of how cash back rewards and general awards work on a credit card. Here's what you need to know.

Cash Back Cards

For these types of cards, your reward is given in only cash. The amount you receive will depend on your spending, so the more you spend, the more money you will receive. Rates are often calculated through percentages. For example, let's say you have a credit card with 3% cash back. If you spend $3,000 monthly, you would receive $90 in cash back.

It's essential to know if there are certain requirements for a cash back rewards program. While some cards could use cash back for any purchase, there are ones directly for gas, groceries, or other categories. You'll want to pay attention to these cards to ensure you get the cash you want.

Rewards Credit Cards

A rewards card differs from cash back because it earns points rather than money. Those points can be used for various reasons, depending on the company or credit card issuer. Some reward programs include airlines like Delta, hotels like Hilton, or retail stores like Kohl's. Since your travel schedule or shopping habits can vary, it's important to analyze your own needs and consider which card could benefit you the most.

How Do You Determine Which Type of Card Aligns With Your Spending Habits?

While both cash back and rewards credit cards have benefits, narrowing down which ones will help you grow your wealth the most effectively is essential. Cash cards are a good option if you want just cash back and no other specific perks on your money. If you want more flexibility, a cash back card is the way to go.

A detail to pay close attention to when deciding on a rewards program is to familiarize yourself with any specific rules or tiers on the card. Depending on these tiers, you may be unable to redeem as many points as it seems unless you make the required transactions. For example, you could have a rewards program with a credit card through Disney. However, to earn points on the card, you need to spend most of your money on purchases from Disney stores, parks, or other company-related products, so unless you are a huge fan or travel to the Disney theme parks often, this may not be the ideal card for you. The same principle applies to any other company's credit card.

A tip for knowing which card aligns with your spending habits is to look at your budget to see which companies you spend the most at each month. Maybe you make regular runs to Walmart or frequent orders on Amazon; see what rewards these companies offer. Having a budget can also help you narrow down whether or not you want to have a rewards card or cash back card. Whether you are a middle-aged mom caring for her family or a world traveler, you'll realize which areas of your life you're spending the most on in your budget.

How Can You Calculate the Value of Reward Points or Miles?

After narrowing down the top credit cards you're interested in, you might be confused about how to calculate the overall value of each card. One of the ways to help you stay on track in your comparison is to create a spreadsheet, or you can use our free credit card comparison guide. Whichever way you choose to organize the cards' information, you will want to consider each of the following.

1. Rewards

How many points will you earn for each dollar or cent you spend? Write down what the system is.

2. Annual Percentage Rate (APR)

APR explained in simple terms is the cost of borrowing money on a credit card. These rates can vary depending on the credit card, and it is crucial to analyze rates to understand the potential financial impact in your comparison.

3. Additional Fees

While not every credit card has an annual fee, many do. You'll want to see how much it is and when you'll need to pay it each year. Annual fees can range from $100 to $700, with the higher fees coming from more exclusive and premium cards.

After considering all these factors, you'll have a clearer understanding of how much the credit card will cost you and how much you'll earn in awards or cash.

What Are Some Common Pitfalls to Avoid When Using Rewards or Cash Back Cards?

Everyone loves to receive free cash and rewards, but it's important not to get carried away with the excitement and spend carelessly. Here are some things to avoid when using credit cards.

Too Much Dependence

When using your card, you mustn't depend too much on your spending. Remember, the rewards you earn are only helpful if you protect your financial stability. No amount of travel points or cash back will be enjoyable if you get yourself deep into credit card debt.

Not Sticking with a Budget

What was once a carefree situation can quickly become critical if you begin jeopardizing your finances. When you make purchases, be sure you have a well-established budget you follow. Recklessly using a credit card can harm your credit score, budget, and financial health.

Going Over Your Credit Limit

Like any credit card, it's important to make your payments on time and in full. Don't miss payment due dates to prevent your credit score from being docked.

Choose the Right Credit Card with Leaders Credit Union

Are you ready to earn the points and cash back you've wanted on your credit card? Leaders Credit Union is happy to help you navigate the ins-and-outs of credit card rewards programs. To find out which ones are best for your financial journey, be sure to check out our free credit card comparison guide. Contact our Financial Champions for any questions.
 
Leaders is federally insured by the NCUA.