Travel rewards vs. cash back: Do you really want to be practical?

True, cash can pay off debt, but c'mon. Dream a little

By Cathleen McCarthy

Cashing In

Cathleen McCarthy is a journalist whose articles on travel, commerce and consumer topics have appeared in dozens of publications. She writes "Cashing In," a weekly column about credit card rewards programs, for CreditCards.com Ask a question. 'Cashing In' archive

Dear Cashing In,
I've been having an argument with my father over which kind of rewards cards are better. He insists you get more bang for the buck with cash-back than miles. He also points out that I have other financial needs (like student loans) besides overseas travel. My argument is that this is about "rewards," and I just don't feel rewarded by cash back. I want a prize for my effort! Do you think he's right and I'm being an idiot? -- Lisa

Dear Lisa,
If your father is anything like mine, his argument is that if you want to buy a plane ticket with credit card rewards, you can save up cash-back rewards and buy the ticket. It's simpler than trying to redeem frequent flier miles and your options are open -- i.e., you can use the cash on anything, not just travel. There's a strong argument there.

If you're an idiot, however, then so are most people who join loyalty programs to collect points and miles. Most of us still opt for travel when given miles or points to spend. Generic miles and travel rewards were introduced partly as a response to the need for more redemption flexibility than a co-branded airline card offers, but more fantasy-fulfillment than cash back -- that feeling of a "prize."

I was talking about this not long ago with Christopher Barnard, president of Points.com. "Travel has that aspirational connection," he says. "It makes people feel better that they're striving for something a little bigger than $8.42 back on a purchase."

Barnard's company is based in Toronto, where one of the largest loyalty programs is Aeroplan. Because it's independent from Air Canada, Aeroplan actually has to buy the airplane seats. "So they have a financial incentive to get me to use my miles for nontravel activity, and they've tried over the last few years to ramp that up," Barnard says. "But 70 percent of people continue to use their points for travel, even after a lot of marketing to get them to use them for something else."

For most airlines, it's actually more affordable to give away miles toward flights than anything else, because that's the commodity they deal in. "The plane's going anyway and typically there are empty seats and they can manage that inventory," he says.

The value of miles is harder to pin down than cash, however. Someone with 20,000 miles in her account and family and friends on the opposite coast is going to value miles differently than someone with 500,000 miles accrued from business travel.

Barnard, who has been running Points.com for a decade, has found that despite this difference of opinion about the value of miles, "one common thread of people who participate in these programs is they all have this aspirational view of them: 'I'm doing all this to get to Fiji one day on these miles.' Even though they frequently head to Albuquerque for their cousin's wedding instead, there's just not as much aspirational value in turning rewards into $4.97 to buy a latte."

Given that dozens of cash-back credit cards deliver that at reasonable or no annual fees, Barnard agrees with your dad in a practical sense. If travel is not a primary incentive, then you're not a good candidate for travel loyalty programs. If it is, though, you could argue that earning free travel via rewards is one way to save your cash for paying down debts.

"With a little diligence and planning, miles can get you a business class trip worth thousands -- way more than 2 percent cash back would end up offering," Barnard adds. "Let's say it's 100,000 miles to book a business class ticket. At a dollar spent per mile with some bonuses and special offers like double/triple miles in there, that would probably be $85,000 in spend. With a 2 percent cash-back card, that's $1,700. Business class anywhere is probably three to four times that cost."

That's the central theory of serious miles collectors, but you may not be in the $85,000 spend category at this point. I understand your father's concern that you get yourself settled financially before getting caught up in the pursuit of business-class seats on overseas flights. As a travel junkie myself, however, I think rewards should be one place where you can put some effort into your dream of exploring the world. Just make sure you have a solid plan in place to get rid of debt while you're doing that.

See related: Promotions can boost rewards on a Valentine's Day splurge, Taxes, tuition can rack up rewards, for a fee, 4 rules to win at the credit card rewards game

Gary Foreman, "New Frugal You"

Sally Herigstad, "To Her Credit"

Cathleen McCarthy, "Cashing In"

Jane McNamara, "Let's Talk Credit"

Elaine Pofeldt, "Your Business Credit"

Erica Sandberg, "Opening Credits"

Published: February 12, 2013

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