Cracking the Code: Cash Back Credit Cards or Points and Miles Credit Cards - What is better for Lower Income Americans?
Understanding Cash Back Credit Cards
Let's kick things off with the basics. Cash back credit cards are a type of credit card that essentially pay you for using them. Typically, these cards offer a percentage of the money you have spent on purchases back to you in the form of cash rewards. These percentages usually range from 1% to 5%, depending on the card and the type of purchase.
What this means to you is straightforward - for every $1 you spend, you'll receive a few cents back in rewards. This reward can either be applied as a statement credit in future months, or, in some cases, deposited directly into a checking or savings account.
Debunking Points and Miles Credit Cards
On the other hand, points and miles credit cards do not directly return money to you. Instead, these cards allow you to accrue points or miles that can be redeemed towards various rewards, typically travel-related ones such as flights and hotel stays. These reward categories often also include experiential outings, gift cards, or even charitable donations.
An important thing to note is that the value of points and miles is not universal. Their worth can vary greatly depending on the card and how you redeem them. You might accrue 50,000 points and discover they are only worth about $200 in travel rewards.
Determining What's Best for Your Pocket
Before we delve further, it’s essential to mention that both cash back and points/miles cards, like all credit cards, are most beneficial if you pay off your balance in full every month. Regular balance-keeping can lead to interest charges, which can negate any rewards earned.
For lower-income earners or those on a tight budget, cash back credit cards are usually the better choice. The key reason is that you're earning straightforward, tangible rewards—cash! Cash provides greater flexibility: you can use your rewards to pay down the card balance, or use it as an extra buffer in your budget.
Points and miles cards tend to offer value if you’re a frequent traveler. But for those who don’t travel often, building up points or miles might just end in a pile of unused benefits. The time and effort you invest in navigating redemption systems and blackout dates might outweigh the benefits too.
Deep Dive into Cash Back Cards
Even within the realm of cash back cards, not all are created equally. Most cards offer fixed cash back rates, usually around 1-2%, on all purchases. However, some offer higher rates in specific categories like groceries, gas, or dining. You'll want to consider your spending habits and choose a card that rewards you the most in the areas you spend big.
Another important factor to consider is the card’s annual fee. Some cash back cards come with a fee, which can be as high as $100. If you're not spending enough to offset this cost with your earned rewards, a card with no annual fee could be a better fit.
When Might Points and Miles Work for You?
While our emphasis has been on cash back cards being more suitable for lower-income Americans, there's still a chance a points or miles card could work for you. For example, if you have family scattered across the country and regularly fly to visit them, a miles card could offer immense value.
Furthermore, some points and miles cards offer sign-up bonuses that can equate to a large sum of flight miles or points, making the benefit seem hard to pass up. However, these sign-up bonuses often come with a catch—you usually have to spend a certain amount within the first few months of account opening. Make sure you're not stretching your budget just to achieve this.
The Bottom Line: Your Lifestyle Dictates Your Card
You want your credit card(s) to benefit you and align with your spending patterns and lifestyle. If you're a low spender or infrequent traveler, a cash back card is likely your best bet. Choose a card with an annual fee and reward structure that complements your spending habits.
A points or miles card might be the better choice for those with high spending in particular categories or frequent travelers. Just remember, it's essential to pay off your balance monthly—rewards don't outweigh the negative effects of ongoing interest charges and bad credit scores. Happy hunting!
