Cashback, points, or miles: What should you choose in a credit card?

We always say that not all credit cards are created equal and that their rewards do not have the same value, and we understand that this can be confusing. 

Depending on how you want to use your credit card rewards, some will benefit you more than others. 

Many people relate the rewards they earn to an equivalent of 1 cent per point, meaning they assume that 10,000 points or 10,000 miles are always $100, but in reality, receiving $100 in cash back, 10,000 United miles, 10,000 Citi ThankYou® points, or 10,000 Hilton points is not the same. 

Of these examples, only the $100 in cash back has a fixed and exact value, which would obviously be $100, no more and no less.

But what about the others? Let's check it out: 

Generally speaking, credit cards in the United States typically offer one of three types of rewards structures: cash back, points, or miles.

This can become confusing because sometimes, the credit card itself calls its rewards "cashback" when it actually generates points, or "miles" when it actually generates cashback, and there are even times when we generate cashback but it can also be used as points and vice versa. Nothing complicated, right? 😂

To overcome this confusion, we must familiarize ourselves with each credit card program and understand, regardless of what the bank wants to call it, what type of rewards we are actually generating and what is the best way to use them to get the maximum value for them. 

Let's look at the differences between the types of rewards and explain them with examples:

Cashback

Cashback is literally what we know as a refund when we use our card to buy something. 

If a card offers us 2% cashback on all our purchases, when we spend $1,000 we get a $20 refund. Simple. 

This cashback generally accumulates in a sort of "piggy bank" within our bank account as we use the card, and when we want to use it, we simply redeem it as cash (usually you can make a transfer to our checking account or they send you a physical check) or as a statement credit to reduce our account balance and that's it, very simple. 

Cashback is, then, a form of savings on our purchases.

It's great, but it's not the most exciting thing.

Miles

Miles, for the purposes of this classification, are those we generate through airline credit cards or through other means like flights.

There are non-airline cards that claim to generate "miles" simply for marketing purposes, but actually generate cashback or points.

An example of this is the Discover it Miles, which earns "miles," but these miles can be redeemed for cash or as a statement credit for travel expenses, which in practice makes them cashback. They are not actually airline miles.

On the other hand, Capital One travel cards earn Capital One "miles" (called Capital One Miles), but they are actually points like those from American Express or Chase. These are small but important details that we must know about each credit card ecosystem.

So, when we talk about miles, we specifically refer to airline miles. 

If a card earns miles, we are talking about airline cards like American Airlines, Delta, United, Southwest, JetBlue, etc. 

Points

Lastly, we have points, which can be classified into 2 subcategories: flexible or transferable points (the ones we want to focus on), and non-flexible points, which work similarly to cashback. 

An example of flexible points is American Express Membership Rewards®, since in addition to the usual redemption options, we have the ability to transfer them outside of American Express to different hotel and airline loyalty programs where we can get a variable value for them depending on the specific redemption we make.

It is worth noting that not all American Express cards earn flexible points; some earn cash back, others miles, and others hotel points. 

On the other hand, non-flexible points are those that end up being like earning cashback (or worse), since their redemption options are limited and the maximum value to be had is the equivalent of cashback. 

An example of this could be the Bank of America Travel Rewards credit card. This card earns points, but these have a fixed value. The most we get is 1 cent per point when redeeming them to pay off part of our statement balance. They cannot be transferred outside of Bank of America to obtain a higher value.

If we have 10,000 points, their maximum value will be $100, although they could be worth even less if redeemed for gift cards, for example.

There is one last subcategory we didn't mention, and that is hotel points. These act similarly to airline miles: they can be accumulated through hotel chain credit cards, or through stays.

These points usually have a lower value than the rest (with exceptions, as usual), but they are equally useful for any strategy of traveling with points. 

Does it sound complicated? It is no coincidence

All this confusion happens because of how banks classify their credit cards' rewards to compete with each other, even though they actually offer very different products.

The good news is that once you become familiar with each program, you will see that you are understanding each one and which ones you need to give more importance to.