In my previous installment of my Points & Miles 101 series, we had a general overview of the different types of credit cards. We now will begin going over each type, starting with cashback credit cards.
Most people reading this will focus on credit cards that offer explicit travel rewards. However, it’s important to couch these rewards within a general understanding of cashback credit cards.
Why? Let’s first discuss what a cashback card is and its use case. We’ll then discuss why any points & miles collector needs to think about cashback cards, and then discuss who might use a cashback credit card instead of collecting points and miles.
What is a Cashback Credit Card?
Cashback credit cards are the unsung heroes of the credit card world. I like them because they provide a very simple rewards structure that gives you cash in your pocket.
These work by rebating you a portion of the swipe fees that card issuers take when using your credit card. The store pays the credit card issuer. The credit card issuer then gives you a portion of that payment back to you as a rebate.
For example, pretend that you spend $100 at the grocery store and pay for your purchase with a cashback card that gives you 1.5% back everywhere you go. That grocery store might pay 1.8% back to the credit card company for the right to offer you paying by credit card. The credit card company then gives you that 1.5% back as a rebate on spending.
Why might the credit card company give you that money? I think there are two reasons.
First, credit card companies have found that they actually entice your typical consumer to spend more by offering that rebate. People will say, “I get cashback, it’s ok”, even when they don’t really need to make that purchase. The credit card company then receives more revenue.
Second of all, with economies of scale, credit card companies are actually making a ton of money. It’s not much money if it’s just you spending that money, but if a million people are spending on their credit card each month, when adding another customer basically costs almost nothing to service, you can make a ton of money by enticing people to spend on their cards. Every cardmember matters, but, at a certain point, it costs next to nothing beyond the rebate for each cardmember.
Why Use a Cashback Credit Card?
In my mind, a cashback credit card is perfect in two instances.
First, you like the simplicity of having cash in your pocket. Credit card points can pretty much only exclusively be used for travel. Cash can be used anywhere. You can pay your bills, throw a party, or invest that cash.
Second, you don’t want to have to think about finding value with your travel points. Your American Airlines miles are much more restricted in how they can be used. Travel is great! But that’s really all that you can use them for. You can’t fill your gas tank up with American Airlines miles or Hyatt points.
Why Should Points & Miles Collectors Think about Cashback Credit Cards?
If you’ve read this far, you probably are asking, “All of this is great, Professor, but why does this matter to me as someone who wants to travel more?”
I think this is important because a cashback credit card sets the baseline value that you need to get from each point and mile.
Consider the Citi Double Cash Card (no referral link, I literally do not get paid for it. Here’s a list of cards I can get paid for is here). The card advertises itself as getting 1% back when you buy something and 1% back when you pay off your credit card. In essence, it’s a 2% back credit card. For every dollar you spend, you get 2% of your purchase back in cash.
To my knowledge, this is the minimum value you should get back for every dollar you spend. Consider this: let’s say you have a Delta American Express card, where you get 1 Delta mile back for every dollar that you spend. Delta is well-known for trying to value their miles at about 1.3 cent per point during redemption.
If you had the option of choosing a Delta point that was valued at 1.3 cents (and can only be used for flights sold on Delta’s website) or 2% in cashback, which would you choose? Obviously the cashback!
Thus, for all travel hackers, when thinking about the value of what you spend, you need to make sure that you are, at a minimum, getting 2% back for all of your spend.
Who Should Get a Cashback Card?
I think there are really two categories of people who are perfect fits for cashback credit cards.
First, if you are the type of person that wants one credit card, and one credit card only, this is the perfect credit card for you. You know you’re getting a singular value. In my opinion, the top two cards for this are the Citi Double Cash card or the Discover IT Miles card (which, despite it’s name, you get cashback).
Second, I think cashback credit cards are great for people who primarily travel domestically and use non-chain hotels. Domestic travel has always been a poor use of travel points when thinking of cents per mile. Furthermore, if your first reaction when looking for accomodations is to go to Airbnb or Hotels.com, then you aren’t going to be using hotel rewards. By using cashback cards, you can just use the cash to pay for your stay.
Conclusion
This lesson reviews cashback credit cards: what they are, why you should use them, and who they are best for. It is my hope that you can figure out if these are the best cards to use for your purposes.
What do you think about cashback credit cards? Are they something that you see yourself using?