If you're considering a rewards credit card, you've surely seen offers promising "1% cashback," "2 Nectar Points on all spend" or "4 miles on flight purchases." Credit card rewards are all based on point, miles, or cashback in one form or another. But without knowing the real value of the relevant points or miles, it may be difficult to understand which offers are ultimately best. We've created this guide to help you make heads and tails of credit card points, miles, and cashback offers. You will better understand which type of rewards program will perform best for your spending habits, and be able to choose the credit card that is best for you.
Cash Back, Points, and Miles: How do they Differ?
The main difference between cash back, points, and miles is the flexibility they provide to consumers. At their core, all three things work in the same way - make a purchase with your credit card and earn a "thank you" reward (in the form of points, miles, or cashback) from the card issuer.
Points: Rewards points can be redeemed at designated locations for products and services. The precise value of the points varies from program to program and it’s often possible to convert the points between points programs or even into miles for a fee. Some of the most common points programs in the UK are:
- Amex Membership Rewards
- Tesco Clubcard
- SPG Starpoints
- IHG Rewards Club
Miles: Miles can be used to get free flights at partner airlines, as specified by the program (well, the fare is "free" but you still need to pay for taxes, fees, and carrier charges for all tickets bought with miles). The value of a mile depends on how you redeem your miles and can be anywhere from £0.002 to £0.027 per mile. Typically the miles redeemed for long and costly flights are worth more than the miles used for short, economy class trips. As a very rough-and-ready guideline, you can and should try to get 1p of value per mile on most of the large air rewards programs.
Cashback: Cash back is the most flexible and easiest-to-use rewards system. Cash back cards return a percentage of your spending made using the card. Often, the percentage varies by spending location (e.g., the Asda Cashback Plus card pays 2% on Asda spending and 1% on non-Asda spending) or by category (e.g., The Costco TrueEarnings card pays 3% on dining, 2% on travel, and 1% elsewhere). Cashback is either paid as statement credits or store vouchers.
Cash back, Points, or Miles: Which Should You Choose?
As a general rule, points and Miles can be worth more than cashback. However, it takes savvy management of a points or miles program to extract that potential value. In the case of miles, it also takes money to earn money - miles are usually worth the most when you use them to upgrade to business/upper class seats, but this requires first paying for a full premium economy fare (not a discounted economy fare.) Keep in mind also that some points programs require you to earn or use points every year or else you forfeit all earned points. Points and miles programs do best for those who are happy spending time to understand their rewards program and hunting for the best way to maximize value.
Cashback may initially appear to offer lower potential rewards rates, but Whether your reward card accumulates points or miles, they are worthless unless you use them. Since cash back can be used immediately after receiving them, the decision between cash back and miles depends on how frequently you can redeem your points or miles. Unless you fly frequently, cash backs are more beneficial for you since you may not get the chance to use your reward miles.
Compare Reward Rates: Cashback vs. Points vs. Miles
Imagine you're considering three different rewards cards, thinking, "For every pound spent, I could earn 1% cashback, 2 Nectar Points, or 1.5 miles - which is better?" To decide which rewards card offers the best return on your spending, it is necessary to compare the cards on equal footing. To measure the card's efficiency (i.e., how much money do you get back as rewards for the money you spend), we calculate a figure called the rewards rate. By expressing all rewards as a rewards rate, we can compare across cashback, points, and miles. For example, if one card refunds me 2% of my expenditures while another card gives me 1%, the first card is more valuable.
The first step to calculate the rewards rate for a points or miles card is to figure out the worth of the underlying miles or points. To figure this out, you have to find out how many points or miles are required to redeem a prize. In order to calculate the pound value per mile or point (£/mile or £/point), divide the pound value of the said prize by the number of miles or points needed. For example, a recent search of premium economy round-trip flights from London to New York on Virgin Atlantic found off-peak fares around £489, which you could pay for with 35,000 miles. The value of a mile in this case is £489/35,000 = £0.014.
To translate the £/mile or £/point into a rewards rate, you need to take into account the terms of the card regarding the number of points or miles you'll earn for every £1 you spend. For instance, the Virgin Black card gives you 2 Flying Club miles per £1 spent on general spending using the American Express card. If we assume for a moment that you will redeem you Virgin miles achieving a value of £0.013/mile, that means you could earn a rewards rate of 2.6% (2 x £0.013 per £1 spent) on your everyday spending. (Keep in mind that you may earn a lower rewards rate. For instance, redeeming 20,000 miles for an off-peak economy seat to NY would only value those miles at £0.007, half the value of a Premium Economy redemption.)
Finally, you may earn more points or miles in different categories, e.g., on flights. Going back to the Virgin Black example, cardholders earn twice the rewards rate on Virgin Atlantic or Holidays spending. Also, many air miles credit card accounts come with two credit cards: an American Express and a Visa/MasterCard. Usually, double rewards are earned on the American Express card. If you understand how your monthly expenditure is distributed among the various categories, you can figure out your rewards rate - it will be different for everybody. Using this analysis you can find the best credit card for you.