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One of the most common questions I hear concerns credit cards: Which is the right travel-rewards credit card for me? A better question, though, might be: Is a travel-rewards card right for me?
Travel Rewards Credit Cards vs. Cash Back Credit Cards
While it's generally possible to get a heftier return-on-investment with a good travel-rewards card by combining of promotions, category bonuses, and award discounts, in practice most consumers would do better from a sheer ROI standpoint to charge their purchases to a card that rewards them with cash, either in the form of a statement credit or a check. And a cash rebate isn't just more valuable in monetary terms; since cash can be used to purchase anything, including travel, it's much more useable than a free flight or hotel room night. Cash, as they say, rightly, is king.
As a rule, loyalty miles or points are worth between 1 and 2 cents each, so 1.5 cents apiece on average when redeemed for travel, which typically generates the highest ROI. (When redeemed for consumer goods, by contrast, miles are usually worth considerably less than 1 cent each.) So for the average consumer, who has neither the time nor the inclination to make a serious hobby of mileage maximization, earning and redeeming rewards points amounts to a 1.5 percent rebate on travel.
The 2 Percent Solution
Why settle for a 1.5 percent ROI, limited to travel rewards, when it's possible to get a 2 percent rebate in cash? Here are a few options for doing just that:
The Fidelity Rewards Visa Signature card returns 2 percent of net purchases, deposited into either a Fidelity Investments brokerage, IRA, 529, or cash-management account. If you're already a Fidelity customer, as I was when I applied for this card, it's an easy way to automatically channel the rebates into existing saving vehicles.
If you're a member of the Pentagon Federal Credit Union, the country's third-largest credit union, you can apply for the PenFed Power Cash Rewards card, which rebates 2 percent in cash or a statement credit, provided you have an active PenFed checking account or are an active or retired member of the military. New cardholders can earn a $100 statement credit by charging $1,500 during the first 90 days.
Not a Fidelity or PenFed customer? Consider the Citi Double Cash Card, which kicks back 1 percent of the purchase amount when charged, and a second 1 percent when the credit card bill is paid. As with the Fidelity and PenFed cards, there's no annual fee.
And finally, it's worth mentioning the newly introduced no-fee Amazon Prime Rewards Visa Signature card from Chase. If you're a Prime member of Amazon, the card rebates a hefty 5 percent on most purchases at Amazon.com, plus 2 percent at restaurants, gas stations, and drug stores, and 1 percent for other purchases. New cardholders will receive a $70 Amazon credit when their card application is approved. Non-Prime members get a 3 percent rebate.
While the 5 percent rebate isn't cash per se, the ability to apply it to the purchase of thousands of products available on Amazon.com makes it cash-like in its utility and value.
The Benefit of Travel Rewards and Cash Back Cards Combined
Of course, there's no law that requires consumers to choose one type of card or the other to the exclusion of the either. It might behoove you to have both a travel rewards card and a cash back card, and choose between them opportunistically, depending on your priorities at the time. Case in point: me.
If you peeked into my wallet, you'd find several travel-rewards cards plus three of the above-mentioned cash-back cards (Fidelity, Citi, Amazon). That's a relatively recent state of affairs. For many years, I put the bulk of my spending on the Citi / AAdvantage Platinum Select World Elite Mastercard, because I was able to get solid value from my participation in American's loyalty program. (Disclosure: Citi is an Airfarewatchdog advertiser.) For instance, back in the 1990s, I redeemed 25,000 miles for a last-minute ticket from Los Angeles to New York, to attend to a family emergency. If purchased, that ticket would have cost $1,900, so I was getting 7.6 cents per mile—terrific value.
Since then, two things have changed. First, American's program became less rewarding for the average traveler (as did the programs of Delta and United). And second, during the same period, cards returning a consistent 2 percent cash back appeared in the market.
As a result, today I am much more likely to reach for one of my cash-back cards than I am for a travel-rewards card. In fact, I plan to cancel two of my airline cards next time their annual fees come due. At that point, my credit card collection will be heavily weighted toward cash-rebate products, with just a token airline card still in the mix.
You might want to consider doing the same.
Editor's note: This content is not provided by any bank, credit card issuer, airline, or hotel chain. Any opinions, analyses, reviews or recommendations expressed here are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by the aforementioned entities.