5. Rewards Vs Cash-Back Credit Cards (Part 2)

Welcome to Point Me to First Class, the only show for employed professionals, entrepreneurs, and business owners who are looking to optimize their higher-than-average expenses to travel the world. I'm your host, Devon Gimbel, and I believe that your expenses are your greatest untapped asset if you know how to leverage them. Ready to dive into the world of credit card points and miles so you can travel more, travel better, and travel often? Let's get started.

Welcome back everybody to today’s episode, which is part two of the cashback versus rewards credit card showdown that we started last week. Today we are going to be looking at whether it makes sense to continue using cashback credit cards at specific stores even if you're already using rewards credit cards for most of your purchases in order to earn points.

I wanted to talk about this because something I often see is that someone will have one or a few great points earning credit cards, and they’ll be using those really strategically to optimize earning extra points in the bonus categories those cards offer. For example, using a Chase Sapphire Reserve card for dining and restaurant spend in order to earn three Chase points for every dollar spent. Or using an American Express Gold Card for grocery purchases in order to earn four American Express points for every dollar spent.

But we also continue to use credit cards that function as cashback credit cards for very specific purchases. Like using a Target credit card for Target purchases or having an Amazon credit card that they only use for buying things through Amazon. The reason that people tend to hang on to these store specific credit cards and continue using them when they don’t earn points or miles from them is often because they offer really strong cashback rewards.

Like the Citi Costco card that earns 2% cashback when used to make purchases at Costco. Or the Target card that offers 5% back on Target purchases, or the Amazon credit card that gives 5% cashback on Amazon purchases. I think for some people, you do actually end up ahead by continuing to use store specific cashback credit cards rather than putting all of your spending on points earning credit cards.

So my intention with this episode isn’t to convince you to stop using store specific cashback credit cards entirely in favor of using points earning credit cards exclusively, but rather to help you more objectively evaluate whether you could actually get more value from points earning using rewards credit cards for those purchases than the cash rewards you're currently getting so that you can be deliberate about which cards you use for which purposes in a way that serves you best.

But in order for you to be able to objectively evaluate that, you need a framework that allows you to compare the value you get from using store specific cashback credit cards versus using rewards credit cards for those same purchases in order to earn points. Before we dive into the details of comparing rewards from store specific cashback cards and points earning cards, there are a few things that I want to mention.

First, the content that we’re going to cover today builds upon the concepts that I talked about in part one of this series, which was episode number four that aired last week. So if you haven’t yet had a chance to listen to that episode, I recommend that you press pause here and check out episode number four before you keep listening to today’s episode.

Second, in this episode we are going to get a little bit mathy. I think it really helps to hear examples broken down using numbers. While I favor using easy, round numbers in my examples, we will be getting a little granular with the math today. So if you're someone like me who can find it difficult to follow any reference to math or numbers just by listening, this might be a good episode to listen to when you're able to sit down with a pen and paper and write down these examples. I am a very visual learner and processor. So I know personally I would have no hope of understanding this information only in auditory format.

With those suggestions out of the way, let’s get into the details about why you might continue using store specific cashback credit cards even when you're sold on the idea of points travel and use rewards credit cards for the majority of your other purchases. And how to know once and for all whether that is a great strategy for you, or if you would actually get more value from the points earned by using rewards credit cards for those purchases.

So the first step may sound very obvious, but it’s to know what store specific cashback credit cards you're using and why you're using them. Humans are creatures of habit. So it’s possible that you're continuing to use a store specific cashback credit card just because it’s a card you’ve had for a while, and you're used to using it for purchases at that store, but you haven’t actually stopped to evaluate how that card or its rewards are really benefiting you.

So take a minute now to pull out all the store specific credit cards you're still using. Obviously don’t do this if you're listening to this podcast while driving, but when you're in a safe space, get all your store specific cards out, like that Target card, the Amazon card, the Macy’s or the Best Buy card, the Neiman Marcus card. You get the idea.

Note two things. Number one, what's the cashback rewards earning rate of that particular card? For example, if you have the Citi Costco card, it earns 2% cashback on Costco purchases. The Target credit card and Amazon credit cards both earn 5% cashback on Target and Amazon purchases respectively. Number two, take note of any additional perks or benefits that credit card might offer that are really valuable to you.

Some store specific credit cards offer free services within that store for cardholders like free tailoring of clothing or early access to sales that you might find particularly valuable. I'm not going to comment too specifically on the value of these non-cash rewards benefits of store specific cards other than to say that if you're continuing to use a store specific cashback card because you love these non-rewards benefits and don’t want to let those go then that’s a great reason to continue using that card for those store specific purchases.

But if you're using the store specific cashback credit card only for the value of the cashback rewards, how do you know that you wouldn’t get more value from the points earned by using a rewards credit card for those same purchases? That is what we’re going to focus on for the rest of this episode.

I think that in order for you to really objectively evaluate whether you'd get more from a points earning credit card for your Costco purchases than a Costco credit card or more value from a points earning credit card for making your Target or Amazon purchases than a Target or Amazon credit card requires three things. Number one, you have to do the math to calculate how much you currently earn in cashback rewards for your spend at that store and compare it to the number of points you could earn if you used a rewards credit card to make those purchases instead.

Number two, you have to identify the breakeven point at which you can get more expected value from points earned using a rewards credit card to make those purchases than the cash reward you earned using your cashback credit card. Number three, you have to compare the cashback value you're currently getting using cashback credit cards to the potential value you could get from points after optimizing your choice of credit card that you use for those same exact expenses.

Now, I think it’s easier to understand this framework and process by hearing some examples using real numbers. So this is the part where we’re going to dive into the math of whether you can get more value from points earning credit cards than store specific cashback credit cards. I'm going to use as examples the Citi Costco and the Target and Amazon credit cards, but you can obviously insert in the details of whatever particular store specific credit card you're currently using to do this analysis for yourself.

The first step in determining whether a store specific cashback credit card or a rewards earning credit card is better for store specific purchases is to do the math. This is as simple as knowing the percentage cashback your store specific credit card earns as rewards and how much in cash value you actually derive from using that credit card for shopping at that particular store either monthly or annually.

Again, to keep the numbers really straight forward, I'm going to use as an example throughout this exercise someone who spends $10,000 a year on a store specific credit card. So that could be $10,000 in expenses in Costco annually using a Costco credit card. Though, let’s be totally honest. You're lucky if you can make it out of a single Costco trip not having spent $10,000 in some week. Okay, not really, but I do personally have a serious Costco plant acquisition problem and have spent more than my fair share on those amazing little succulents that they sell there, but back to our exercise.

If you spend $10,000 annually at Costco and you use the Citi Costco card for those purchases, you’d earn cashback rewards at a rate of 2% on that particular card giving you $200 in rewards at the end of the year. If you have a store specific credit card with a higher cashback rewards rate, like the Target credit card or the Amazon credit card that offer 5% cashback on purchases at those stores when you use their specific credit card, that $10,000 spent annually on purchases at those stores would give you $500 in cashback rewards at the end of the year.

Step number two is to determine the breakeven point at which you can get more expected value from points earned using a rewards credit card to make those purchases than the cash equivalent you earn using your cashback credit card. Here’s how to do that.

Let’s assume that instead of using your store specific credit card to make your $10,000 in purchases annually, instead you use a rewards credit card that earns one point for every dollar spent. Easy enough. At the end of the year, you’d have earned 10,000 points for your $10,000 in purchases at Costco, Target, or Amazon.

But what we really want to know is can we reasonably expect to get more cash equivalent value from those 10,000 points than we could from the cashback we earned from our different store specific credit cards. The way I try to answer this is to calculate how much value per point would I have to get in order for those 10,000 points to be worth more than the cashback I earned from the respective cashback credit cards?

In the case of the Costco credit card that earns 2% cashback. So 10,000 spent on that card in a year would give us $200 in rewards. In order to get more than $200 cash equivalent value form 10,000 points, we would have to get at least two cents per point in value when redeeming those points for travel.

In the case of a Target credit card or an Amazon credit card that gives even higher cashback rewards at 5%, we’d have to get even more value from points in order to breakeven. At 5% cashback, $10,000 spent on Target purchases using a Target credit card or Amazon purchases using an Amazon credit card would give us $500 in rewards. In order to get more than $500 cash equivalent value from 10,000 points, we would have to get at least five cents per point in value when redeeming those points for travel.

I don’t expect you to know just yet how to put those figures into context. So I’ll just tell you that I think it’s pretty reasonable to get two cents per point in value from your points once you know some basic redemption strategies. But five cents per point, that’s a different story. There are absolutely opportunities to get five cents per point or more value from points, but I don’t consider that guaranteed or something that you can count on by any means. Especially if you don’t already consider yourself pretty skilled at points redemptions.

So here is takeaway point number one. If you currently use a store specific cashback credit card that offers you around 2% cashback or less as rewards, you can pretty easily match or exceed the value of the cashback you receive with that card by switching to a points earning credit card instead. But if your store specific cashback credit card is earning you 4% or 5% cashback rewards, the decision isn’t as clear, especially if the rewards credit card that you would use for those purchases instead only earns points at those stores at a rate of one point per dollar spent.

But remember on the last episode I mentioned that one of the fantastic and really powerful aspects of rewards credit cards is that oftentimes you can strategically use rewards credit cards that allow you to earn more than one point per dollar spent on your purchases as a way of accelerating your points earning. So if you could actually earn two points or three points or four points or more for those Costco or Target or Amazon purchases then the math really changes. This is where step three of this exercise comes in.

Step three corrects for the assumption we just made in step number two that you can only earn one point per dollar spent using a rewards credit card for those store specific purchases by taking into account strategically choosing rewards credit cards that offer increased points earning. The reason I really want to explore this step is because when people do a comparison of rewards earned by a store specific cashback credit card versus points earned with a rewards credit card, they're usually only doing the initial comparison that we just did in step two of a rewards credit card that only earns one point per dollar spent.

Even people who have a great basic understanding of rewards credit cards sometimes stop their comparison at this point because one thing they know is that even though lots of rewards credit cards offer increased bonus points for certain categories of expenses like dining expenses or extra points for travel expenses. What they astutely note is that no rewards credit cards offer increased bonus points for specific retail stores like Target or Amazon.

Okay quick sidebar here for some of the more points experienced in our group. There is one specific rewards credit card called the Chase Freedom Flex card that sometimes offers five times Chase points for purchases made at specific retailers like Target, Costco, and Amazon. But this bonus points earning is limited to $1,500 spent at the designated retailer, and it’s not available as a constant or perpetual bonus category on this credit card.

So for the intents and purposes of this podcast episode where I'm trying to keep things simple, there are no rewards credit cards that offer ongoing, sustained bonus points earning at individual retailers like Costco, Target, and Amazon. All right? Exit sidebar.

So if there aren’t any rewards credit cards that have as a bonus category specific stores then how can you earn more than one point per dollar spent for these types of purchases? There are actually several different ways to do this. But, again, in the interest of keeping things simple and straightforward, we’re just going to look at two approaches you can use to earn more than one point per dollar spent at these types of stores.

The first approach is to have a rewards credit card that offers increased points earning for what is referred to as non-category or non-bonused spend. These credit cards offer 1.5 or two points per dollar spent regardless of the category of expense, and can be an extremely effective way to guarantee that you are always earning increased points for all of your expenses.

An example of this type of credit card is the Capital One Venture X card, which earns two Capital One points for every dollar spent regardless of what category that expense is. So if you used that Capital One Venture X card for your $10,000 in Costco expenses, you’d earn 20,000 points instead of the 10,000 points that you would earn by using your rewards credit card that only earns one point per dollar spent on non-bonused spend.

Likewise if you use the Capital One Venture X card for your $10,000 in Target expenses or $10,000 in Amazon expenses, you would earn 20,000 Capital One points instead of the 10,000 points you'd earn by using your rewards credit card that only earns one point per dollar spent on non-bonused spend. Now the math becomes more favorable when comparing the potential cash value equivalent of points earned using a rewards credit card for these expenses than the value of cashback earned using a store specific cashback card.

Remember that using a Citi Costco card that earns 2% cashback would reward you with $200 after putting $10,000 of Costco expenses on that card. The Capital One Venture X card would earn you 20,000 Capital One points for that same $10,000 in Costco expenses, and you would only have to get one cent per point in value from those 20,000 points in order for them to be worth more than the $200 in cash you got from the Costco card. Please hear me when I say that it is exceptionally easy to get one cent per point in value from your points. You'd actually have to try pretty hard to get less value from your points.

But how does using a credit card that earns two points per dollar spent change the math when comparing the value of 20,000 points earned against a cashback card that earns 5% as rewards like the Target card or the Amazon card? In order for those 20,000 points to be worth more in cash equivalent value to the $500 in rewards earned as cashback from $10,000 of expenses, you'd have to get at least 2.5 cents per point in value when using those points.

While getting that much value from points isn’t something that you should expect from every single redemption, it is much, much more feasible than getting five cents per point in value.

So take home point number two. When comparing the return on store specific cashback credit cards and rewards credit cards is this. If you have a rewards credit card that offers you increased bonus points from all spend or what's referred to as non-category or non-bonused spend then you can very likely get more value from the points earned with that card than the equivalent cash value you get from using the store specific cashback card, even at the 5% rate of cashback rewards.

But the opportunity doesn’t stop there. Because the second approach I want to talk about today is how to get more than two points per dollar spent because it is possible to get three points, four points, even five points per dollar spent at specific stores even though there aren’t any rewards credit cards that have these stores as bonus points earnings categories.

That is because there are several places where you can purchase store specific gift cards like Target gift cards that you can then use to make your regular purchases at Target. Amazon gift cards that you can load onto your Amazon account to make your Amazon purchases, and many, many others. You can strategically purchase these gift cards at places that will allow you to earn bonus points for that purchase.

Here are some examples so that you can understand what that looks like. There are three main types of stores that often have a great range of store specific gift cards that you can purchase. These are drug stores like CVS or Walgreens, grocery stores including large chains like Whole Foods as well as more regionally based grocery stores, and office supply stores like OfficeMax or Staples. And if you get a credit card that offers increased bonus points for spend at drug stores, grocery stores, or office supply stores then you can use that credit card to purchase store specific gift cards in order to earn bonus points on that purchase.

Here’s what that might look like. Rewards credit cards like the Chase Freedom Unlimited card or the Chase Freedom Flex card offer three points per dollar spent at drug stores. So you could go into a local CVS or Walgreens and buy a gift card to any specific store offered there, like a Starbucks gift card or a Nordstrom gift card or a Target or Amazon gift card and pay for your gift card purchase from a drug store with a Chase Freedom Unlimited or Chase Freedom Flex card and earn three points per dollar spent on those gift cards.

Then you use the gift card when you shop at that specific store, either in person or online. That way you have leveraged your credit card’s drugstore bonus category to effectively get three times Chase points for store specific spend.

Another place that is great to load up on store specific gift cards are grocery stores. There are several rewards credit cards that have fantastic bonus points earning for grocery store spend. For example, the Citi Premier card earns three Citi thank you points for every dollar spent at grocery stores. One of my personal favorites, the American Express Personal Gold card, earns four American Express points for every dollar spent at grocery stores.

So if you went to your local grocery store and purchase Amazon gift cards using your personal American Express Gold card, you would earn four AMEX points for every dollar you spent. If your family is anything like mine and your average annual Amazon spend rivals the GDP of a small country, I want you to imagine how many points you can wrack up simply by employing this one points earning strategy.

At three or four points earned per dollar spent, the math starts tipping heavily in favor of using rewards credit cards over cashback credit cards for store specific spend in the cases where you can purchase store specific gift cards at drug stores, grocery stores, or office supply stores.

Let’s go back to our original example of someone who spends $10,000 on Amazon purchases in a year and earns $500 cashback from making those purchases with the Amazon credit card that earns 5% cashback on Amazon purchases. If instead of using an Amazon credit card for Amazon purchases you instead purchase Amazon gift cards at a grocery store using an American Express Gold card, you would earn 40,000 American Express points for that same $10,000 in spend.

40,000 American Express points can be worth a hell of a lot more than $500 in equivalent cash value. For example, you can book a one way business class seat from Austin to Honolulu on Hawaiian Airlines for 40,000 American Express points. That flight is going to price out at much higher than $500.

The math becomes even more favorable if you have one specific credit card, the Chase Ink Business Cash credit card that offers five points per dollar spent at office supply stores. Because if you have this credit card, you can stop by your local OfficeMax or Staples store and purchase store specific gift cards there for five times Chase points on your purchase. Doing this, you’d earn 50,000 Chase points for your $10,000 spent on Target gift cards for your Target shopping or Amazon gift cards for your Amazon shopping.

In order for you to get more value from 50,000 Chase points than the equivalent $500 that you would earn from using your store specific cashback credit card that earns 5% cashback as rewards, you'd only have to get one cent of value per point, which is exceedingly easy to do.

So there you have it. Three simple steps that walk you through how to determine if you can get more value from using rewards credit cards for store specific purchases than the cash value equivalent you can earn from using cashback store specific credit cards. If you or someone you love has been hanging on to a cashback rewards earning store specific credit card for dear life and are ready to consider possibly relinquishing it, here’s a recap of what to do next.

Number one, identify if you want to hang on to and continue using a store specific credit card for reasons unrelated to the cashback rewards. Again, if you have a specific benefit or benefits from using store specific credit cards that you love and don’t want to give up, that’s totally fine. In that case, stop here and continue using that credit card in happiness and good health.

But if you're considering shifting your store specific spend to a rewards credit card instead, move on to step number two, which is determine the rate at which your cashback store specific credit card earns rewards. Specifically what percent of cashback does it earn? Then move on to step number three. Consider shifting that store specific spend onto a rewards credit card that offers more than one point per dollar spent for all non-bonus or non-category spend if you currently have one.

Even better is to shift that spend to a rewards credit cards that offers more than one point per dollar spent to acquire store specific gift cards to use instead. This most likely would be a credit card that offers increased points earning at drug stores, grocery stores, or office supply stores.

Finally, if you don’t currently have a rewards credit card that offers increased bonus points for non-category spend or rewards credit cards that offer increased bonus points at drug stores, grocery stores, or office supply stores, consider whether you want to apply for one so that you can boost your points earning.

All right everybody. That’s everything that we’ve got for today. I hope you have a fantastic week, and I will see you back here same time, same place next week for our next episode.

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