Cashback vs. Miles and Points: Which is Better?

How to Get the Most out of Credit Card Spend

A reader named Blake wrote in to ask me the following question about credit card rewards: If your intent is to travel, would you rather have travel points rewarded you or straight cash? My thought is that with cash I have more freedom to search the cheapest flight, at the right time, going to the right place. Do you think this is a true assumption?

Man pondering whether cashback is the way to go

It’s a great question—one that probably a lot of folks have. Years ago, I agreed with Blake’s assumption. “Cash is king,” I thought. Often, it is. But sometimes, you can do better—even much better—with miles and points. Let me explain.

When Cashback is Better than Miles and Points

Reasons why cash is better than miles and points include:

  • More Redemption Options: Cash can be used for any type of travel. There are many fewer ways to redeem airline miles or hotel points.
  • Greater Flexibility: Blackout dates and limited award availability restrict your ability to redeem airline miles and hotel points. There are no such restrictions when using cash.
  • Sales: Drops in the cash price of a flight or hotel room usually do not reduce the number of miles and points required to purchase that same flight or hotel room. So sales have the effect of increasing the value of cash as compared to miles and points. Take, for instance, the many recent sub-$500 roundtrip flights between the US and Europe. At those prices, paying cash is a steal. But using miles is a bad value as you’d have to redeem the same number of miles for that $500 flight as you would for a $1,500 flight to/from Europe.
  • No Crazy Devaluations: Without notice, airlines and hotels can (and sometimes do) increase the number of points required for an award redemption. Such changes suddenly make the miles and points you have worth a lot less. It is much less likely for cash to devalue so substantially.
  • Less Complicated: It seems almost inconceivable to have a currency and not know how to spend it. That’s because we are used to cash, which is so easy to use. But miles and points are precisely such a currency. It isn’t always obvious how to redeem them.
  • Not Just Travel: But perhaps the biggest reason why cash is so valuable is because you can spend it on anything, not just travel. You can even invest and grow it.

In light of the many benefits of cash, I would draw the following conclusion: Whenever you can earn either *cashback* or *miles and points whose expected value is roughly equivalent to the cashback*, you are better off earning cashback.

For example, it is better to earn 2% cashback than 2 miles, when each mile is worth 1 cent apiece. (For the value of miles and points in various programs, see the second tab of the Google Doc embedded on this page.)

When Miles and Points are Better than Cashback

The many benefits of cash notwithstanding, there are scenarios in which it is smarter to earn miles and points. Consider these:

  • When Chasing a Signup Bonus: The #1 reason why it can make overwhelming sense to earn miles and points rather than cashback is because of credit card signup bonuses. Credit cards offer big signup bonuses when you spend a certain amount (say $3,000) within a certain timeframe (say 3 months). The signup bonuses are rarely cash. Usually, they are miles and points. Imagine an offer to earn 60,000 United miles after spending $3,000 in 3 months. If you forgo the offer and put that $3,000 of spend on a 2% cashback card, you earn $60 ($3k x 2%). If you take advantage of the signup offer, on the other hand, that same $3,000 of spend will earn you 60,000 United miles. That’s enough for a roundtrip flight to Europe. Roundtrip flights to Europe may cost $400-1,800 in economy. So you are earning $400-1,800 of travel rather than $60.
  • Premium Cabin Travel: Another reason many folks like to earn miles rather than cashback is because of the value you can get when redeeming miles for business class and first class awards. If you spend $70,000 on a 2% cashback card, you earn $1,400 cashback. If you spend $70,000 on a United card, you earn 70,000 United miles. You could then redeem those miles for a one-way flight to Europe in first class. Such flights often go for more than $8,000. So if premium class travel is a goal, you can save substantially by earning and redeeming miles rather than cashback.
  • Outsized Redemptions: A penny is always worth a penny. The value of miles, by contrast, can sometimes increase beyond their average value. United, miles, for instance are usually worth about 1.4 cents apiece. In that case, earning 2% cashback is better than earning 1 United mile per dollar spent. But imagine a scenario where you have to make a last-minute trip, perhaps a flight to a funeral. A last-minute, roundtrip domestic ticket could cost $750. You may be able to book that same flight with 25,000 United miles. In that case, each United mile would be worth 3 cents ($750/25,000). In that case, you’d be better off having earned 1 United mile per dollar spent than 2% cashback.

Given the benefits of miles and points, I would draw the following conclusion: If you can put your spend toward earning a signup bonus on a credit card and/or if your goal is premium class travel, you are best off earning miles and points rather than cashback.

Conclusion

Many factors influence whether it is better to earn cashback or miles and points. For that reason, folks will draw different conclusions as to which is best for them.

I’ll leave you with the rule that I, personally, follow when it comes to earning rewards on spend:

  1. I always try to be working on the minimum spend required to earn a credit card signup bonus. Doing so yields the biggest return on spend.
  2. Whenever I’m not working on the minimum spend required to earn a signup bonus, I use a 2% cashback card.

Question: Do you prefer cashback or miles and points? Why? You can leave a comment by clicking here.

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