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This episode comes from our new series “This or That,” in which the NerdWallet Travel team reviews different travel options.
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You can redeem points for travel with credit cards that earn points, and cash-back cards earn cash that can be used to pay off your next credit card statement. Cash-back cards offer more flexibility and can be used for any type of purchase. Cash-back cards have lower annual fees (often as low as $0), so cardholders don’t have to be as meticulous about using the benefits to justify the expense of the card.
While there is often an annual fee for travel credit cards, they are usually more expensive and offer more perks. Travel credit cards can earn you more points for spending on categories such as travel and dining. They may also offer free hotel night certificates, automatic status, access to airport lounges, credit towards TSA PreCheck application fees or Global Entry application fees, among other perks. A travel credit card, even one that is annual, could be a good option if you are a frequent traveler and plan to make use of many of the benefits.
You can have both cards, if you have the budget and want to maximize your rewards.
Be honest with yourself. A travel card is better if you are maximizing every benefit, such as staying in a hotel on a $500 off certificate and then you can transfer points like a professional. If you prefer simplicity, a cash back card is a good option.
You can shop around: There are many travel and cash-back credit cards. For the most up-to-date reviews, visit NerdWallet to help you find the best one.
Maximize your cards: It doesn’t matter which card you choose, ensure you maximize your benefits by taking advantage of all the available benefits.
Learn more about points and miles with NerdWallet:
Sean Pyles: This is the NerdWallet Smart Money Podcast. We welcome you to send us your money questions, and we will answer them with the help our brilliant Nerds. Sean Pyles is my name.
Today we present the next installment of our “This or That” Travel series. Today’s question is: Cash-back or travel credit card? You might feel ready to apply for a new travel credit card after last week’s thorough dive into points. Or you might not be so sure. Do I want to keep it simple?
Sally French joins us today to help you pick your next card. Sally French is a travel writer and you might recognize her from NerdWallet’s video content. Sally, we are grateful for your presence.
Sean Pyles: Let’s start by dispensing that there are a few credit cards that are NerdWallet partners in this episode. However, that doesn’t affect the way we talk about them.
Sally, I understand that you are passionate about travel credit cards. However, I am more interested in cash-back cards. This episode will help you convince me to switch my ways.
Sally French, well, I’m honest with you. Cash-back cards can be great. I use cash back cards for most of my daily spending. So even if you don’t have a cashback card, it’s not necessarily bad. However, if you are looking to travel the world and live the high-life, I would recommend at least having a travel credit.
Sean Pyles: Yes. They don’t have to be mutually exclusive. If you are able to manage them responsibly, you can have many cash-back and travel cards. But that’s another story. Let’s begin with the basics. What is the difference between a travel card and a cash back credit card?
Sally French: Let’s start with the cash back credit card. It sounds exactly like it. Cashback is earned for any purchases made on the card. It was quite common back in the day to earn 1% on your spending. Your bank will give you $1 in cash-back rewards if you spend $100. It’s not uncommon to find cards that offer 1.5%, 2%, or higher on your purchases.
You also have travel credit cards. These cards do not usually earn cash back but instead points. These points can be used to redeem for travel.
There are two types of travel credit cards. There are cards that can earn general travel points and are often linked to a bank. These cards include American Express Membership Rewards and Chase Ultimate Rewards. These can be used to book travel with a variety of issuers. On the other hand, a travel credit card might be tied to a particular brand such as a hotel or airline. These cards will allow you to earn frequent flyer points, which can then be used to redeem for travel with these brands.
Sean Pyles: It’s obvious that cash-back cards can be a lot easier than that. Cashback is simply a percentage of your purchases. You can also use your travel credit card to get points, miles, and other benefits to help you maximize the amount you receive to make it possible to take a nice vacation.
Sean, you are absolutely right. Someone who doesn’t like to complicate things, wants to know the basics. If I spend $100 I get $1-$2 back. This money can be used to pay my next credit card bill. It’s simple and straightforward.
Travel credit cards can become a part-time occupation for many people. You can see the people staying in overwater bungalows in Bali to collect their travel rewards. However, they are also putting in a lot of effort to transfer the points to the right programs. This is not for everyone. This is a part-time job that allows them to maximize their points and get the best value. Cash-back cards are a great option for many people. For the amount you spend, you get great rewards.
Sean Pyles: For sure. You’re really into travel credit card. Could you tell us about the appeal of travel credit cards?
Yes, Sally French. Yes. They will usually offer higher points for travel-related purchases. You’ll usually earn insane amounts of points if your travel credit card is tied to a particular hotel or airline brand. You can also earn bonus points in related areas, such as dining.
Earning points is just half the battle when it comes to travel credit card. All of these benefits are available with travel credit cards. The benefit is usually greater if the annual fee for a travel credit card is higher. It’s quite common for travel credit cards to offer foreign transaction fees, regardless of whether they have an annual charge. This is a requirement for me to recommend a good credit card for travel. It’s amazing how many people travel abroad and pay these foreign transaction fees which can sometimes be anywhere from 1% to 3 percent of your total purchase.
Sean Pyles: Yes. Sally, I’ll say it, but my cash-back card, which I love, does not charge foreign transaction fees.
OK. This is a great benefit. I’m into it. The benefits of travel credit cards are often even more. The card will vary, but most people see many other benefits. You might be eligible for free checked bags if your card is tied to an airline. If you pay the $20-30 annual checked bag fee, and fly round-trip with several people, this alone could help you to cover the cost of the annual fee.
Sean Pyles: Okay, here’s the deal. I don’t check my bag. My bag should never be lost. Even though I carry it everywhere, I keep an AirTag in my bag. According to my understanding, if you’re a travel maximizer and you plan to take a big bag with you, and you want to travel to exotic locations, the travel credit card might be a better option.
Yes, Sally French. Although I do not check bags, there are many other benefits. If you look at things such as hotels, where many hotel credit card have annual fees of around $100, it is common to find credit cards with a free certificate for a hotel room night. NerdWallet lists which credit cards offer this. Although there are usually limitations to the hotel room free night, I have always used my hotel room certificate certificates at hotels that otherwise cost $200 or $300.
Sean Pyles : That’s very nice.
Sally French, when you paid $100 annually for a hotel room you would have otherwise paid $200.
TSA PreCheck is another benefit. TSA PreCheck is a must if you are traveling frequently. If you are listening to this podcast and don’t have TSA PreCheck, turn it off and apply immediately. Without it, I cannot travel.
You can get lounge access, credit card travel insurance and rental car insurance. Although the benefits of each travel credit card are different, it is not unusual to find these things. Once you calculate the true value of these things, the annual card fee is negligible.
Sean Pyles: It’s important to remember that you have to calculate things in order to decide if an annual fee is worthwhile. Many people won’t want to do the math.
Yes, Sally French. Calculating is crucial. You must also consider the opportunity cost. So I often hear people saying, “Oh, this card costs $100 annually, but it earns 33% back on dining.” This is in contrast to the 1% no-annual-fee card. You have to calculate the opportunity cost. Even though you aren’t earning the 1%, you don’t have to pay the annual fee. Let’s say you have a $100 credit card with an annual fee. It’s easy to say “Hey, I booked $200 hotel rooms using this credit card. The credit card’s $100 annual fee is only $100 so it was definitely worth it.” Assuming that the hotel was one that you would pay in cash.
It’s when you start looking into credit cards with annual fees of $400 or $500 that it becomes a problem. Some credit cards are very common, and they hover around $700. NerdWallet offers calculators that will help you determine if the benefits of credit cards are worth it.
Some benefits are just too complicated or burdensome to use. A few credit cards offer an Uber statement credit every month, but they are only $10 per month. It doesn’t cost $120 per month. NerdWallet offers calculators that will help you understand. What percentage of your credit card benefits are you going to use Uber?
Sean Pyles: Yes. You also mentioned the calculator NerdWallet offers. In the show notes for this episode, we will include a link to it. You can find that at nerdwallet.com/podcast.
A second thing that I want to mention is the fact that I actually have two tiers for my cash-back card. One has an annual fee, and one does not. I must also add that I am lazy with my credit cards and that I don’t want to pay an annual charge for a cash back card. The benefits of the paid version without the annual fee aren’t that great. Sally, how do you see this equation?
Yes, absolutely. You can get very geeky and use NerdWallet’s calculators. Even if the annual fee is paid, are you getting out-sized value?
The reality is that you will still have to pay the annual fee at some point. This will require you to allocate space in your budget. Annual fee credit cards are difficult because you have to anticipate how much you will spend. You might say, “Yes, I use Ubers every month.” What if you travel to a country without Ubers for a month? You’ll lose that. You think you have done the calculation. Then, life happens.
Personally, I pay over $1,000 annually in credit card fees. This money is money I could have spent on travel. There’s nothing wrong with you saying “You know what? I don’t want to pay annual fees.” You may realize that you are making a sacrifice and you won’t get the best benefits for your travel, but it doesn’t mean you have to feel like you’re being held responsible for the annual fee.
Sean Pyles: Yes. People are often trying to decide whether they want a travel credit or cash-back card. It all comes down to the benefits you get. Cash-back can be a bit boring or simple, as if you’re just getting cash back to buy groceries or other necessities. My approach is a little different. I save my money until I have at least $300, which can be a long time. Then I use that cash to buy something electronic, most often an item I don’t want to purchase. I felt like I was getting a treat when I used all my cash-back to buy fancy Apple headphones.
Yes, Sally French. There are many people who can’t afford to travel. But we all want that little treat, no matter what, and it doesn’t have to be travel. If you don’t have the funds to buy these things in your budget, forced savings accounts with cash-back rewards can be a good option. Once you have $300 you can treat yourself with something that you might not otherwise have.
There are also people who get small monthly payments automatically deposited into their accounts. So maybe they only get $10 back in rewards each month. However, that $10 can be used to pay rent or other essential expenses. It’s important to do everything you can to reduce these expenses for many people.
Sean Pyles: Correct. Sally, you mentioned that some cards with cash-back earn 2% back. What is the earning rate for a cash-back credit card compared to travel credit cards? Is there a comparable percentage?
Sally French’s travel credit cards do not earn a fixed cash rate. While they might earn three points for every dollar spent on dining out, it’s not a guarantee of 3% back. It’s not $3 for a $100 restaurant bill.
These cards allow you to book travel through their portal. The more expensive the credit card is, the more valuable the points will be. Chase credit cards have a $0 annual fee. Some of these points can be used to redeem Chase’s travel portal at one point per cent. There are also higher-end credit cards with higher annual fees. These points can be redeemed in Chase’s travel portal for one point per one cent. There is an advantage to higher annual fees cards.
Sean Pyles: Yes. These numbers make my head spin a bit. However, I’m willing to let you sell me the travel credit card. Is there a benefit you feel is overlooked by these credit cards?
Yes, Sally French. Yes, that’s right. TSA pre-check, or global entry.
Other than having access to the airport lounge, I wouldn’t pay $50 for one-time admission to use the lounges. I am the one who just brings my own PB&J to work. However, I now have airport lounge access and can recall a time when my flight was delayed by three hours. My day would be destroyed if my flight was delayed three hours. I am a fast-moving, anxious person. It was an amazing lounge and I felt focused and productive. When I discovered that my flight had been delayed, I was thrilled. I now have another complimentary meal in the lounge. I will have another cup of coffee. I am being very productive. It’s amazing, I feel so relaxed right now. This is amazing. My three-hour delay on the flight is not a problem. These are the unexpected benefits of credit cards, particularly travel credit cards. They can make your trip even more enjoyable.
Sean Pyles: Yes. The annual fee gave you that peace of mind.
Sally French You can’t put a dollar sign there.
Sean Pyles: Yes. Travel insurance is also offered by travel credit cards. Let’s talk about this too.
Yes, Sally French. Another benefit that is often overlooked is travel insurance. This is another benefit that I don’t often pay for. Many people who take these once-in-a lifetime trips are likely to have travel insurance. There was a huge uptake in travel insurance sales during the COVID pandemic, when everything was unpredictable and borders opened and closed. However, the truth is that I view it as an additional expense that I find difficult to pay for. Many travel credit cards with or without annual fees will provide travel insurance for trips purchased on the credit card. The higher the annual fees card, the greater the coverage and the better quality of your travel insurance.
You should always check your policy to see what’s covered. Each policy has different terms. If you book a trip and pay for it with your credit card, but suddenly a hurricane strikes, and you need to stay on an island for the night, then your credit card travel card will reimburse you for the extra hotel room. Again, check your terms. Check what is covered. This can save you a lot of money in the worst cases.
Sean Pyles: Okay. Let’s talk about some of these perks cash-back cards offer. While they are not as glamorous as travel insurance, they can be very useful for everyday situations. This is in line with the way you use travel credit card cards. Cell phone protection is one of the things I am thinking about. Could you please give us an overview of how it works?
Yes, Sally French. This benefit is not available on every cash-back credit cards, but it’s something I see more often. You can get cell phone insurance if you pay your phone bill with that card. There are different terms and conditions regarding what is covered if your screen breaks. It is unlikely that you can just throw it in the ocean to get a new one. There might be a co-pay fee. NerdWallet also offers tools to help you identify which credit cards offer cell phone protection. These types of benefits are becoming more common as credit card space gets more crowded.
Sean Pyles: Okay. I can see why many people think that cash-back credit cards and travel credit cards sound great. They might also be indecisive. The good news is that people can have both, as we stated at the beginning. Right?
Yes, Sally French. Sean, it’s a bit like “this or that”, but you don’t have to choose. Both can be used, and I do. Americans have on average three credit cards and 2.3 store or retail credit cards. Experian’s 2021 report shows that this is the average. You can have a few credit card.
A great cash-back credit card gives me great rates on all my daily spending. Then there are my travel credit cards. I only use them when I’m actually staying at those brands. I can use my credit card to get free Wi-Fi when I fly. Then I make a few more purchases each year on that card. You can have multiple credit cards. However, there are people who have more than one credit card.
Sean Pyles: Yes. It might be a bad idea to have multiple credit cards at once. What should someone consider if they are going to pick one of two cards: a cash-back or travel card?
Sean, that’s true. It’s not a good idea to apply for all of your credit cards at once. These can temporarily affect your credit score. Some banks may limit the number of credit cards that you can apply for within a given year.
However, when weighing the pros and cons of a credit card, I recommend looking at your expenditures. It might be a good idea to have at least one general travel credit card if you spend a lot on travel this year. If you are someone who travels frequently with one travel brand, such as United Airlines or work travels, and you only take the exact same flight once per month, then you might consider getting a United credit card. If you are able to commit to the travel brand, it may make sense to get a Hilton card even if you only visit your family four times per year.
However, if your travel plans don’t look like they should, you might consider a cash-back card.
Sean Pyles: I got it. Sally, thanks for all your help. Please share your tips for taking away.
Yes, Sally French. It’s important to get to know yourself first. Travel is better if you are someone who maximizes every benefit. For example, if you have a free night certificate for a hotel that costs $500 per night and you are willing to transfer the points and do the calculations, you might consider traveling. Cash back is okay if you prefer simplicity, Sean and I know this to be true. Both are fine.
Second, shop around. There are many travel and cash-back credit cards available. NerdWallet has the most up-to-date reviews so you can easily find the right one.
My third and final tip? Make the most of all your cards, regardless of which one you choose. You should always maximize the benefits of your card, especially if you have to pay an annual fee.
Sean Pyles: That’s great. Thank you for speaking with us today.
Sally French Thank you, Sean.
Sean Pyles: That’s all for this episode. Have a money question? Call or text the Nerds at 901-730-6370 to ask your questions. That’s 901-730-NERD. You can email us at [email protected]
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Meghan Coyle produced this episode. Tess Vigeland edited our audio. Kaely Monahan mixed the audio. A big thank you to all the NerdWallet pros for their assistance.
This is our disclaimer: We do not offer investment or financial advice. This geeky information is intended for entertainment and general education purposes only and may not be applicable to your particular circumstances. All that being said, enjoy the Nerds until next time.