Cash back or airline reward credit cards?

Cash back and airline cards are two of the most popular rewards credit cards on the market. What are they? Which one's right for you? Let us help. 

How they work
Generally, the idea behind these two types of reward credit cards is that for every dollar you spend on the credit card, you'll earn either a percentage of money back or a certain number of airline frequent flyer miles. The cash back reward credit cards usually issue account holders a rebate check once a year, and it can be spent however the cardholder wants. Airline rewards cardholders accumulate frequent flyer miles, which can be used toward airline tickets once a certain number has been reached. With many airlines, the number of miles required for domestic flights is 25,000.

The airline miles reward credit card
Airline reward credit cards are sponsored either through the airlines themselves or through banks. Credit cards offered through an airline allow consumers to earn miles toward tickets on that airline only, while some bank-sponsored airline credit cards allow the cardholder to choose to which airline the earned miles should be applied. A typical airline reward credit card earns one airline mile for each dollar spent on the card and often offers thousands of bonus miles just for signing up for the card.

Airline reward cards can be a great option for credit card users who pay off their balance each month. However, the high interest rates and annual fees for most cards make carrying a balance an expensive option. Some airline cards charge as much as $85 per year for annual fees, which over a period of years, can potentially cancel out any reward benefit. For example, paying an annual fee of $85 for three years adds up to $255, an amount that would have otherwise paid for most advance domestic tickets. Cardholders should also be aware that many frequent flyer programs restrict the traveller to certain dates of travel and types of seats, and that the miles expire after a certain period of time.

However, the benefits can be significant as well. Many airline reward cards often partner with hotel chains, rental car companies, and even long-distance telephone companies, allowing the customer to earn extra miles when they shop at the partner merchants. Airlines also offer promotions when customers purchase tickets to certain destinations, on specific dates, or in a specific way (online, for example), allowing miles to add up more quickly. Additionally, if a cardholder must make a last-minute travel arrangement, he or she can afford the usually high ticket cost by cashing in the airline miles.

Cardholders hoping to make the most of airline rewards credit cards should keep up-to-date with current promotions, use the partner merchants when convenient, and pay for cheaper trips while reserving the miles for more expensive travel.

The cash back rewards credit card
The cash back reward credit card allows cardholders to earn a cash rebate on purchases they make using their credit card. Generally speaking, the amount varies from 1 per cent to 5 per cent. Some companies allow a base level of cash back earnings for all purchases, with higher rebates on certain purchases, which vary by card but might include groceries, items from certain retail merchants, or even gasoline.

One benefit of cash back cards, with respect to airline rewards cards, is the general lack of annual fee. As noted above, this alone can provide annual savings of up to $85. Additionally, members do not have to choose how to spend their rebate checks in advance, unlike some airline reward cards which lock the customer into a specific frequent flyer program.

Which one is right for you?
The bottom line: if you plan to pay off the balance each month and do a lot of travel on any one airline, an airline rewards card could be right for you. If you travel occasionally, and put most of your monthly purchases on a credit card that you pay off every month, consider a cashback rewards card. Cardholders of either type of credit card, as with any credit card, must have enough restraint and self-discipline to use the card only for purchases they can afford to make. It is easy to fall into the trap of talking yourself into using the card for purchases you can't really afford because you're earning miles or a cash rebate. This is especially important because of the generally high interest rates these cards carry. That said, if used carefully, the benefits of both airline reward cards and cashback reward cards can be significant. Before making any decision that could impact your credit, consult with a financial adviser or accountant.

To comment on this story, write Editors@CreditCards.com.

Updated April 14, 2009

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