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Comparing value of cash back cards vs. rewards

Question for the expert

Dear Cashing In,
I spend around $60,000 a month on purchases charged to my PayPal Master Card/Debit Card. I earn unlimited 1.5 percent cash back on each transaction, and it translates to $1,000 a month in cash. When I charge $1,000, I automatically receive $15 back when the transaction clears. What credit card would let me make more money or give me more value? Thank you. — Steve

Answer for the expert

Dear Steve,
Your question presents an interesting argument. The PayPal arrangement is pretty exclusive, and you’ve done well to take advantage of the benefits it has to offer. Unlike other cash-back programs sponsored by bank cards, there are relatively fewer caveats with this program. However, you may not be aware of the most recent modification to the program. On April 8,  the unlimited cash-back has been lowered from 1.5 percent to 1 percent. That is a 33 percent change, and it is relative to debit card purchases that do not require a PIN (there seems to be a growing number of those exceptions these days). If we follow that logic, you now will be earning only about $650 a month from the PayPal Preferred Rewards program, or $7,800 annually.

This change really just impacts the PayPal debit card product since the MasterCard earns you a point per dollar spent, but the rewards are fairly mild — just under the 1 percent threshold:

  • 1,000 points — Free shipping up to $7 on a PayPal purchase
  • 2,500 points — $25 reward voucher
  • 9,500 points — $100 reward voucher

Your question asked about money versus value, and there is not enough space to fully examine all that these two topics do not have in common. Even among those consumers who choose money rewards, their choice is relative to lifestyle and expectations of use. As for value, like art, it is in the eye of the beholder. Now, having gone entirely philosophical on you, let’s give you some what-ifs.

I recently answered another reader question about the comparison of a typical cash-back card versus airline rewards cards. In your case, however, the comparison of value is evident when we consider that the only way for you to earn value from the PayPal system is by spending money. So let’s concentrate on that. We have established from your question that on expenditures of $60,000 a month ($720,000 annually), you will earn about $7,800. That’s real money, no arguments there.

Now, let’s say that you spent that amount using two different travel rewards credit cards.Here’s what you would get:

Spending $720,000 with a Hilton Visa Signature card would earn you approximately 1.5 million Hilton HHonors points. That’s an impressive amount when compared to $7,800. But does it have value?

With those HHonors points, you could spend six free nights at the Hilton Waikoloa Village or the Hilton Hawaiian Village, which would cost you 175,000 points. But, you’d have to get to Hawaii first. So, you would convert more HHonors points into airline miles with American Airlines. If you don’t mind coach, that will use about 300,000 HHonors points. It takes two to have fun in Hawaii, so that’s 600,000 points plus the 175,000 for the hotel. You’ve used 775,000 points so far. Now, shopping for this very same airfare and hotel package on Expedia, you would spend about $2,800. With the number of points you have, you can actually afford this trip twice, meaning that the payout from this rewards card is $5,600 — well below the $7,800 cash payout from your existing PayPal arrangement. In stronger travel periods, it is likely that the value of the same trip will increase about 25 percent ($7,000), which still means that PayPal is the better choice for you right now.

If you were to go with just an airline rewards cards, you’d garner about 750,000 frequent flier miles annually, which equates to about seven business-class tickets to Europe. In today’s environment, those tickets may be valued at $3,500 each, giving you a total value to another type of reward of $24,500. This, of course, is only relative if you enjoy travel, and in this case, want to travel enough to Europe in an upgraded capacity.

The bottom line: For cash back, I think you are truly in the best situation, even with the recent change of conditions to the payout of the PayPal debit card for cash back.

See related:Determining value of rewards redemptionMulti-airlines cards versus single-airline cards

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