What are Points Credit Cards?
“Points” Cards: These cards have points worth a “set” amount. For the majority of banks and most of the time, that means that 1 point = 1 cent, though there are exceptions. So for example, the Chase Freedom offers a 10,000 point bonus if you meet the minimum spend requirements. This is equal to 100 dollars in rewards points. In general, a credit card issuer will offer statement credit, gift cards or travel redemption that are worth 1 point/cent, however certain redemption such as products they sell may have a point value less than one point. There are some credit card points programs that don’t even use points, such as the Discover It, which instead calculates your earnings in real dollars.Because of the many benefits they offer, we’ve been writing about rewards credit cards for years now. However, the fact that there are so many new cards entering and leaving the marketplace means there’s a lot to keep tabs on
What are Cash Back Credit Cards?
“Pure Cashback” Cards: This is a very rare category of cards, where instead of allowing many different types of redemptions like most fixed value credit cards, you can only redeem for cash, which is deposited directly into your bank account. An example is the Capital One Quicksilver, 1.5% cashback card, which can deposit your cashback either annually or once you hit a set amount. The Fidelity 2% Amex credit card requires you to have an open fidelity account, but has no account minimum. The only downside is foreign transaction fees (FX) and being an Amex credit card, it isn’t accepted everywhere. Another example is the Spark Cash Business credit card, earning 2% on every purchase.
What are “Miles” Credit Cards?
“Miles” credit cards: These are essentially the same as “points” cards because they have a set value, so for this purpose they are not considered a separate category. For example, the Capital One Venture and Barclay Arrival both offer “miles” as their reward, but make no mistake, this is a marketing trick. These miles are the same as a fixed value card in that the miles are worth a set amount, namely 1 cent/point. These are not the same as Frequent Flyer miles. The downside to both these cards is that they can only be used to redeem for travel (buses, subways, flights, rental cars etc.) without significant value loss. If you try to redeem them for other products, they become worth only 0.5 cents. Getting a Miles credit card could be a good idea if you think you will want to use travel reward redemption in the future.
How to Value Credit Card Miles and Value Credit Card Points?
First lets compare the cards. Both give 2% back, AF waived for first year. C1 is $59/yr after that and Arrival is $89/yr. Arrival also offers 10% rebate on any points redeemed. They both limit redemptions to “travel” purchases. The 10% rebate effectively makes the Arrival a 2.2% earning card. The arrival has a few nice features. It is a chip and pin, which is crucial for overseas travel, and also comes with a free FICO score and Tripit Pro (normally $49), but let’s ignore that for a few minutes.
Calculate the Value of Credit Card Points Equation
So we need to figure out at what annual spending level is the $30 difference in fees made up for with the extra 0.2% in earnings on the Arrival. It’s basic Algebra (your HS math teacher was right, algebra IS important!). If X is your annual spending, then we want to find out when the points earned on X is equal to or greater than $30. The equation would be:
X*(reward % difference)=Annual Fee difference.
Solving for X the basic equation becomes:
X=(annual Fee difference)/(reward % difference).
For this example, it would be X(0.2%)=$30. We can solve for X to get X=$30/0.2%=$15,000 (don’t forget to put the percent into the calculator since % means “/100”).
So if you are planning on spending more than $15000 on one of these cards, then the Arrival is the better card to use. You can do the same example for the Fidelity Amex 2% Card with no fee. X=$89/0.2% or X=$44,500 . However, the Fidelity Amex card becomes more difficult since you are comparing an Amex with Forex fees to a MC with no Forex fees, and chip and pin tech which is important for international travel.
Let’s look at the Quicksilver Visa card. It is 1.5% back on all purchases (redeemable for cash, though) with no annual fee. X=$89/0.7%=$12,714.29
So, if you are going to spend less than $12,715, the no fee quicksilver card may be better for you. If you spend between $12,715-$15000, then go with the Venture Card. If you spend over $15000, then go with the Arrival card.
Per request, let’s do the math on the BofA Travel Visa rewards card. This has a few more features than the Cap1 Quicksilver. It offers 1.5% back on purchases that can be redeemable to cover the cost of travel purchases. This card, though offers you a 10% points bonus if you have a checking account (which can be a pain to avoid fees), which makes the card actually a 1.65% card. It also has no AF, no foreign transaction fees, and is a chip and signature card, so it should function better overseas compared to the Cap1 card. So let’s do the math based on the 1.65% rate and compare it to the Arrival cards 2.2% and $89 annual fee.
So to compare the BofA card to the Arrival, if you are going to spend less than $16,182, then go with the BofA card. Over $16,182, then go with the Arrival Card.
Best Fixed Value Credit Card in 2016
Currently, the best fixed value card is now the Citi Double Cash. 2% with no annual fee, this makes it better than the Fidelity Amex as Mastercard is accepted in more places than American Express. Also it does not require you to deposit your earnings into a Fidelity account. Both these cards still incur foreign transaction fees while traveling abroad, for that reason, a secondary card that does not carry forex fees such as BoA Travel Rewards or Barclay Arrival may be better.
Cash Back or Points Card or Frequent Flyer Card
Pros of Cash Back Credit Cards:
Any seat, any time: The biggest upside of fixed value cards is that there are no blackout dates compared to using frequent flyer miles or some hotel programs. This is again because your points have a “set value”, so the bank is essentially buying your airline seat with your points. E.g. $100 flight = 10,000 points. This is a big pro for people who want to fly on specific days, don’t like hassle or have families where multiple seats are needed
Earns FF/Hotel Points: Because the bank is using your points to buy the seat, you’re still eligible to earn FF/hotel points on miles flown or revenue spent.
Cons of Cash Back Credit Cards:
Terrible for expensive hotels/premium international travel: Since there is a set value, seats that are very expensive such as business/first class are worth astronomically more points. E.g. $5000 business class ticket would be worth 500,000 points. At an accrual rate of 2.2% with even the best card, the Barclay’s Arrival, this would require almost $275,000 in spend! Similarly, this applies to expensive hotel properties that can go often times for $1000/night. For this reason, FF miles or hotel points can be used to create better value. I like to refer to this as “points arbitrage”, more on that next