The Downside of Cash Back Credit Cards

chase ultimate rewards or cash back cards

Most credit cards that earn points/miles that you can redeem for travel fall into one of 4 categories:

Of the 4 types of cards, cash back cards are at the bottom of my list, especially for beginners.  My best redemptions have been the result of booking through airline or hotel programs.  Now remember, airline and hotel credit cards aren’t at the top of my list for beginners either.  But by transferring points to hotel and airline programs from my favorite credit cards,  I’ve been able to book some great trips!  My favorite cards are those that earn transferrable bank points.

cash back cards chase ultimate rewards American Express membership rewards

Don’t fall for the bull

You might not even realize it, but cash back credit cards are probably the ones that you hear about the most thanks to clever marketing!  For example, that Capital One Venture card that we always see Jennifer Garner slinging is actually a cash back card even though they advertise the reward currency as ‘miles’.*

*Sorry, but as a real miles enthusiast, as in actual airline miles, I cannot call this currency ‘miles’ without using quotes!! 

Im paraphrasing but the Venture tagline is something along the lines of “use your miles for any airline, any seat, and there are no blackout dates.”

Well that may be true but guess what? Those ‘miles’ you’re earning are basically just points that can be redeemed as cash towards travel expenses at a fixed rate.  Usually the fixed rate is 1 cent per point.  More on the math a little later.

These ‘miles’ are not the same as points that can be transferred to airline or hotel loyalty programs like Chase Ultimate Rewards and American Express Membership Rewards can.

While there are no blackout dates for Venture ‘miles’, if you go to book a flight for the Tuesday or Wednesday before Thanksgiving, cash fares are probably going to be higher than normal.  This means that your Venture ‘miles’ aren’t going to get you very far.

There are two sides to this hobby: earning and redeeming.  A lot of my strategy is in the redemption of points and miles. With a cash back card, you’re always going to get a fixed redemption rate. As a result, you may not will not  get your highest potential return on your credit card spending.

1 ‘mile’=1 cent when redeeming on the Venture card. For example, 10,000 ‘miles’ earned from the Capital One Venture card would be redeemable for $100 worth of travel.  To be fair, this card does earn 2 ‘miles’ on all purchases, so even though the redemption rate is 1 cent per point, the overall return on miles earned from everyday spending is always going to be 2%.

cash back credit cards Disney world

If your only goal is Disney World, a cash back card may not be the worst idea, but there are other cards to pursue first!

Do cash back rewards have to be redeemed for travel?

Some cash back cards are specific to travel and only allow you to redeem for travel-related expenses.  Others allow the cash back to be redeemed on just about anything.  Some will even send a check or direct deposit to your bank account.

Benefits of cash back rewards

I mean, they’re still better than using a debit card.   At least you’re earning something.

Some people prefer cash back cards because with cash back you have the ability to book any flight and/or hotel on any date you want. In other words, you do not have to worry about if a hotel or airline has award availability for the dates you need. Plus you can choose any airline or hotel.  A cash back card eliminates the need to learn about airline and hotel loyalty programs. But who would want that? I love finding sweet spots, especially in foreign airline programs!

Also, if you book an AA award flight with AAdvantage miles, you do not earn miles for that flight.  But since booking travel with cash back rewards is like booking with cash, you can actually earn airline miles and hotel points on the flight and/or stay.  But this still isn’t enough incentive for me to use a cash back card for everyday purchases.

Another benefit is that you may be able to use cash back rewards for travel expenses that you cannot book with an airline or hotel loyalty program.  For example, Disney World tickets.

cash back credit cards Disney world

Airline miles and hotel points can be used to cover flights and hotel stays at Disney World. But getting Disney park tickets requires a little more creativity. Cash back cards can potentially help.

The signup bonuses on these cards are sometimes as much as $400-$500. This is a lot, but I value some other cards’ signup bonuses to be even higher.  Again, this is a personal preference so that doesn’t necessarily mean opening a cash back card is a bad idea if you’ve already applied for the Chase 5/24 cards that you want.  More on that next.

Why I do not suggest cash back cards for beginners

If you do not know what I am talking about, read this post about Chase’s 5/24 policy. Basically, Chase is the issuer of some of the best credit cards for travel. Unfortunately, Chase limits the amount of credit cards one can open in a 24 month period.  It is generally believed that anyone who has opened 5 or more credit cards in the past 24 months will not be approved for certain Chase credit cards. This includes any credit card account that shows on your credit report, not just Chase accounts. So if you open 1 Bank of America Alaska Airlines Card, 1 Citi AAdvantage card, 1 AAdvantage Barclaycard, and 2 American Express cards, you’re at 5/24 even though none of them are Chase cards.  

Once you’re at 5/24 Chase will deny an application for a card subject to 5/24 such as Chase Sapphire Reserve.  Trust me, you do not want to miss out on a Chase Sapphire card!  So my suggestion is to wait on the cash back cards from other banks until you’ve opened the Chase cards you want.  

The main reason I do not suggest cash back cards for beginners is the Chase 5/24 rule. But once you’ve opened the Chase cards you want and you’re ready to open more, a cash back card may make sense, especially if you come across a good sign-up bonus offer.  The current bonus for the Venture card is 50,000 miles which is $500, plus the annual fee is waived the first year.  Not bad at all!

The other reasons I do not suggest cash back cards for beginners are the same reasons I do not suggest using cash back cards for everyday spending.

What about using cash back cards for everyday spending?

I do not use cash back cards, and I really don’t suggest them for others since there are more valuable currencies you can earn.  Since my favorite award currencies are bank points that are earned from cards such as Chase Sapphire Reserve, I mostly use bank cards for everyday spending.

Problems with cash back cards
  • You cannot transfer points or miles earned from cash back cards to airlines or hotels
  • The fixed redemption rate (1 cent per point for the Venture) means a fixed return rate on your spending
  • Lack of bonus categories
cash back points/’miles’ cannot be transferred to airlines and hotels

The whole marketing strategy behind cash back cards is that you can use the rewards (cash back) for any travel expense with no black out dates rather than having to deal with airline and/or hotel loyalty programs.

One exception is the Chase Freedom card. ‘Points’ earned from Chase Freedom can be converted to Chase Ultimate Rewards points IF you also have a Chase Sapphire card.

The fixed redemption rate means a fixed overall return rate

Cards like the Citi® Double Cash Card are particularly deceiving. You earn 2% cash back, but when it comes to redeeming, you redeem at a 1% rate.  It still results in a 2% return on your spend, but some of our redemptions, particularly flights in premium cabins, result in a much higher return than 2%.  The Capital One Venture card pretty much works the same with the exception of the bonus for spend on hotels.com.  Here’s an analysis of what you would get for $20,000 in annual credit card spend:

Citi® Double Cash Card:

  • you spend $20,000 a year on your 2% cash back card.
  • This results in $400 cash back
  • There are no partners to which you can transfer rewards earned on this card

With Chase Sapphire Reserve:

This is assuming that your $20,000 spend was without any bonus categories or shopping portals. If you utilize those, you will earn even more points. So most likely if you spend $20,000 a year on your Chase Sapphire Preferred or Chase Sapphire Reserve, you’re going to have even more than 20,000 points.  But for this example, we will use 20,000.

  • All you have to do is look at the example of the Andaz Napa rates during our Napa trip … 20,000 points can get you a $659 hotel room if you transfer the Ultimate Rewards points to your World of Hyatt account.
  • 20,000 points can also get you a roundtrip flight to Mexico or Canada if you redeem with the right partners.  The value of those flights is likely more than $400
chase ultimate rewards transferrable points Hyatt

Rates at the Andaz Napa can get a little cray. But if you have Chase Ultimate Rewards and/or Hyatt points, you don’t have to worry about high rates!

Cash back cards don’t really have bonus categories

The earn rate on non-category spend on cash back cards may seem better than that of other types of cards that only earn 1 point per dollar on most purchases.

Even if there are no bonus categories, you earn 2 ‘miles’ per dollar on everything on cards such as Venture® from Capital One® or Citi® Double Cash Card. But that means that your return rate is fixed at 2%.  There is no opportunity for a better rate. 

There are some exceptions to this.  Off the top of my head:

  • The Capital One Venture earns a 10% bonus on purchases made through hotels.com/venture
  • There are 5% bonus categories on Chase Freedom and Discover it cards.  Every quarter, the categories switch.  But there is a cap on the amount of spend that earns 5%.  Then it goes back to 1%. The cap on both of these cards is $1500 per quarter, so even if you spent the max in the 5% categories for a year, that’s a max of $6,000.  5% of $6,000 is $300.  So you’re looking at a max of an extra $300 annually on bonus spend.
Wait, isn’t 2 miles or points per dollar on all purchases better than 1?

A card that earns Chase Ultimate Rewards or Amex Membership Rewards may only earn 1 point per dollar on non-category bonus purchases.  Why wouldn’t you want to use a card that earns 2 ‘miles’ per dollar?

First of all, always keep in mind that not all points and miles are equal!

There are two sides to award travel: earning and redeeming. It’s just like money.  The goal is to earn more and spend (redeem) less.  But it’s not quite as simple as it sounds, because not all points and miles have the same value.  I wrote a whole post about it here.

chase ultimate rewards bonus category

This glass of wine earned me 3 Chase Ultimate Rewards per dollar!

Bonus category spending on a bank points card could lead to a much higher return rate than a cash back card
If your annual spend is $20,000 on travel and dining on the Citi® Double Cash Card:

This card earns 2% cash back on everything.  There are no bonus categories.  Here’s the return on $20,000 in annual spend on travel and dining.

  • 20,000 X 0.02=$400

Return on $20,000 in spend=2% which is $400.  You can redeem this award currency as statement credits or a check, so you can use the $400 however you want.

If you spend $20,000 annually on travel and dining on the Chase Sapphire Reserve:

Travel and dining are bonus categories on the Chase Sapphire Reserve.  Remember, plane tickets and hotels aren’t the only purchases that code as travel.  For example, Uber also counts as travel.

You will earn 3 Ultimate Rewards points per dollar on travel and dining purchases.

  • 3 Ultimate Rewards per dollar X $20,000=60,000
  • 60,000 UR
  • 60,000 UR are worth 1.50 cents per point if you use the UR portal to book.  Thats $900.
  • $900/$20000=.045
  • 0.045 X 100=4.5%

The return rate on $20,000 annual spend on travel and dining with a Chase Sapphire Reserve card is a minimum of 4.5%!  But it gets better.

The potential gets even better if you transfer to airline or hotel partners rather than using the portal:
chase ultimate rewards andaz Costa Rica world of Hyatt points

Who wouldn’t love a room with a balcony in the rainforest for free?!

You can transfer 60,000 Ultimate Rewards points to Hyatt.  The Andaz Papagayo is a Hyatt category 4 hotel.  Hyatt category 4 properties cost 15,000 Hyatt points per night.  On our recent trip, the lowest rate available was over $600 per night after taxes and fees.  I will use $600 to keep this simple:

  • 4 nights at 15,000 each=60,000 Hyatt points needed. I can transfer Ultimate Rewards to Hyatt.
  • 4 nights at $600 each=$2400
  • Remember that total spend to get the 60,000 points was $20,000
  • $2400/$20000=0.12
  • 0.12 X 100=12%

Thats a 12% return on your spending!!! I promise you will not find a cash back card for even half of that.

If your travel goals involve premium cabin travel, cash back cards are definitely a no-go

A business class ticket to Europe on AA would cost at least $2,000 each way.

  • It would take $100,000 in spend (200,000 ‘miles’) before you earn $2,000 worth of cash back with the Venture card.
  • Even if you earned the current sign up bonus offer of 50,000 ‘miles’, you still need 150,000 more.  That would take $75k in spend!

You can transfer American Express Membership Rewards to Etihad. Etihad is a non alliance partner of American Airlines. As a result, you can book AA flights with Etihad miles.  Etihad’s award chart is more generous than AA.  You can book business class from the US to Europe for 50,000 Etihad miles each way on an AA operated flight.  By the way, AA charges 57,500 AAdvantage miles for the same flight.

  • For 50,000 Amex MR, you can book a one way business class ticket to Europe.
  • You can earn 50,000 Amex MR from just one sign up bonus!!!
  • But even if you don’t qualify for a large sign up bonus at the moment, the most it would take is $50,000 in spend using an Amex MR earning card.  That would be if every purchase was 1 point per dollar.  But you’ll likely earn 50,000 Amex MR without actually spending that much thanks to bonus categories that earn 2 or 3 points per dollar.
  • I realize that $50,000 is still a ridiculous amount of spend, but the point of this example is to show that cash back cards require even more spend!

Conclusion

Since I prefer to diversify my redemption options by earning transferrable points, I feel that cards that earn Amex MR and Chase UR are the best for everyday spending.

  • American Express Membership Rewards has 16 airline partners and 3 hotel partners.
  • Chase Ultimate Rewards has 9 airline partners and 4 hotel partners.

Cash back cards are great for sign-up bonuses, especially if you’re over 5/24. Some cash back sign up offers net $400-$500 to cover any travel expenses.  But for everyday spending, I suggest using credit cards that earn transferrable points.

Depending on your travel goals, you may find some value in using a cash back card.  But for the most part, if you learn how to earn and redeem airline and hotel miles and points efficiently, you will get lots more value from the other 3 types of cards, especially bank cards.

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One thought on “The Downside of Cash Back Credit Cards

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