Why a rewards credit card may be better than a cashback one

By Charlotte Yau

If you’re on the lookout for a new credit card it could be worth thinking about rewards cards to get a few bonuses.

Cashback credit cards are pretty simple to understand. You get money back every time you spend some dosh.

But there is also a slightly more cushty way of earning some free cash by using a rewards credit card instead. A rewards card gives you points that can then be converted into vouchers for discounts at big name stores or to spend on your weekly shop.

We have put together an example to work out whether a cashback or rewards card would be better for you.

Cashback Card

In the cashback card corner, we have the American Express Platinum Cashback Everyday credit card. Representing rewards, we have the American Express Preferred Rewards Gold charge card.

In our example, £6,000 is spent on each card over the course of a year, with £2,000 spent in the first three months and £2,000 of the other £4,000 spent in major supermarkets and petrol stations over the following nine months.

The Platinum Cashback Everyday card pays 5% on up to £2,000 spending in the first three months, so that’s £100 in your pocket. This card then pays tiered rates of cashback depending on how much you spend. As an additional £4,000 has been spent, this earns cashback at 1%, which equates to £40. That’s £140 in total.

Rewards Card

Now, using the same amounts on the Preferred Rewards Gold card, the £2,000 spending in the first three months gives an introductory bonus of 20,000 American Express Membership Reward points. Now if you like to shop at the likes of Amazon, M&S, Gap and House of Fraser, you can convert these points into £100-worth of gift vouchers. That's equal to a 5% return – equal to the value of the introductory bonus on the Platinum Cashback Everyday card.

After the introductory period, you earn virtually one point for every £1 spent, with double points on spending at supermarkets and at petrol stations. So with first £2,000 earning around two points and the remaining £4,000 earning around one point, that’s 6,000 more points. Redeem 5,000 points for another £25 gift card, so you now have £125 of rewards.

But you can do more with your rewards card.

Transfer the 1,000 points to Nectar and use them to get £5 off a whole range of shopping or entertainment options. So that’s £130. Plus you get two airport lounge passes a year, which are worth £34.50-£60. So at the very least that’s £164.50 of rewards.

What’s more, you’ll receive those first 20,000 points not long after you’ve spent £2,000, so you can claim your £100 gift vouchers mere months after you first have the card.

On the other hand, with the cashback you have to wait until the 13th month you’ve had the card. So if your card membership starts on 1st December 2016, you’ll have to wait until December 2017 for your money to be credited.

Top takeaway

Rewards and cashback cards both have their benefits. Most rewards cards are restricted to particular stores or certain types of benefits but if you will take advantage of those benefits then a rewards card can definitely be worth your while. Work out which option is best for you as there is plenty of options when it comes to both cashback and rewards cards but make sure you check the fees you may have to pay and make sure you pay off any balance so you don’t get hit with interest.

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