Credit Card Rewards: Miles VS Cashback - Which Should You Choose?

This post was originally published on my website at thefrugalstudent.com.

When it comes to credit card rewards, there are 2 major camps - miles and cashback.

Sure, there's technically a 3rd camp in points, but they fall under one of these 2 camps since they can either be redeemed for miles or cash vouchers (similar to cashback).

When the time comes where you can start using credit cards, which is the better reward for you - miles or cashback?

In this post, I'll go through some of the pros and cons of each type of reward to help you make a more informed decision.

For an introduction to credit card rewards, you can check out this post.

Miles

Higher Reward %

The first pro of miles is that it offers potentially higher rewards % than cashback cards.

This refers mostly to specialised miles cards which can earn miles at rates of up to 4 miles per dollar (mpd).

In order to determine the % of cash rebate that this is equivalent to, we need to know the value of a mile.

This is a pretty complex topic in itself since there are many factors that can affect the value of a mile.

In general, miles are most valuable when used to directly redeem flight tickets rather than paying for tickets or other expenses with miles.

Miles are also more valuable the more expensive the cabin type of the ticket you redeem (ie First Business Economy).

Other factors include travel destination and travel period (things that affect airline ticket prices).

Even taking all these into consideration, you won't know the true value of your miles until you actually redeem them - so it's hard to determine the exact value of miles.

The MileLion wrote a post about the value of miles which I'll use as a reference.

Based on the article, miles can have a value of up to 5.7 cents per mile (cpm), which is incredibly high.

But this is only true if you redeem miles for First class tickets, and only if you'd otherwise be willing to pay for the ticket in cash.

A more realistic expected value of miles is upwards of 2 cpm, which should be pretty easy to realise by redeeming Business class tickets.

Going back to the earn rate of specialised miles cards of 4 mpd, this translates to a "cashback" value of 8% or more.

This is already higher than the majority of cashback cards, with the potential to exceed 8% depending on the final value of miles realised.

No Monthly Spending Requirement

The next advantage of earning miles is that most of the time, there are no monthly spending requirements.

This is true for both specialised miles cards like HSBC Revolution and general miles cards like Citi PremierMiles.

There are some cards that offer higher earn rates for meeting certain spending requirements like the UOB Visa Signature, but most cards don't have such requirements.

This is beneficial because you don't have to worry about spending $X every month just to earn miles, which can help you save money by not feeling the need to spend money on things you don't need.

In contrast, high cashback cards that offer comparable cashback % to specialised miles cards' 4 mpd (8%) earn rate all have monthly spending requirements.

Delayed Value

One of the cons of playing the miles game is that you don't earn any immediate value from miles.

Miles are technically worth nothing until you actually redeem them for some purpose like flight tickets.

So there is an inherent delay between the time you earn miles and the time you get to realise the value of the miles.

And if anything were to happen to make it difficult to redeem your miles, you may not get to realise the full value of your miles.

Also, since a lot of miles are required to redeem flights, it might take you a few years before you accumulate enough miles to realise some value from them.

This exposes you to the risk of being forced to continue using the card because you have miles locked up in it even if the card may no longer be suitable for your lifestyle (ie the earn rate/categories change).

Miles Validity Period

Adding on to the previous point, another con of miles is that they tend to have an expiry date.

Many miles cards have a finite lifespan for miles that differs depending on the partner bank.

For example, this lifespan is 2 years for UOB and 3 years for HSBC.

This refers to the validity period of the points that are earned from the credit card.

When points are converted to airline miles from your choice of frequent flyer program like KrisFlyer, they will have another validity period.

In the case of KrisFlyer, this is 3 years.

Depending on the card you use, your miles have a total lifespan of 3 years or more.

If your spending is low and it takes you a long time to earn miles, you may not have enough miles to redeem flights even when your miles are nearing their expiration date.

In such cases, you may be forced to buy miles in order to top up your balance to redeem flights or use your miles for less valuable purposes.

Some cards like DBS Altitude and Citi PremierMiles earn miles that never expire, but their miles earning rate is significantly lower at 1.2 mpd as compared to 4 mpd offered by specialised miles cards.

Complex To Optimise

Finally, when it comes to miles, the learning curve is steep.

There are many factors to consider at each stage - from earning miles to redeeming miles.

While you may want to optimise your miles earning rate by using only 4 mpd cards, you run the risk of spreading your miles too thin.

If you use miles cards from several different banks, all the miles you earn are split among them, and there is usually a minimum transfer block to convert bank miles (points) to airline miles.

Not to forget there's also the miles validity period that differs between each bank.

So you'll want to make sure you have more miles than the minimum amount to transfer them to airline miles, and that they are in blocks of the transfer amount to minimise orphan points.

There is also usually a transfer fee that is applicable when you convert bank miles to airline miles.

When it comes to redeeming miles, certain airlines or travel routes may offer better rates than others, which you need to take into account if you want to maximise the value of your miles.

There are many things to consider in the miles game and this makes it quite a bit more complex as compared to cashback.

Cashback

Versatile

The first advantage of cashback as a reward is that it's extremely versatile in the sense that you receive cash.

As far as I'm aware, all earned cashback is awarded to your credit card to help offset your statement bill.

That means you have to pay less than what you actually spent on the card, which frees up some extra cash on your end that you can use for any other purpose.

You can then allocate this cash that you saved towards savings, emergency funds, investments, or other expenses.

In contrast, while miles can be used for a variety of purposes, they are most valuable only when used to redeem flights, so they're not as versatile.

Immediate Value

Next, cashback also gives you the benefit of immediately realising value.

Depending on the cashback card you use, you can typically receive the cashback you earn within the same statement month or the next.

This allows you to realise the value of the cashback you earn pretty quickly, especially when compared to miles which may require years to realise any value.

This almost eliminates any risk of you not being able to realise any value from your spending on the credit card.

You also won't feel compelled to hold on to the card if it no longer meets your needs because you have minimal rewards locked up in it.

Simple

For the most part, earning cashback is simple in the sense that there's not much you have to consider, unlike with miles.

You don't have to worry about having too many cards because all cashback earned will be used to offset your statement for the respective card, so you'll always be able to realise some value.

The only things you need to take note of are the monthly spending requirements, payment methods, and eligible categories, all of which generally apply to high cashback cards.

Unlimited cashback cards are pretty no-frills and straightforward.

There are some cards that make earning cashback more complex than it needs to be like UOB One, but in general, it's pretty straightforward.

Lower Reward %

The first disadvantage of cashback cards is that they generally offer a lower reward % than miles cards.

Cashback cards award a fixed % of cashback for meeting specific criteria, while miles can vary in value depending on the rate at which you redeem them for flights.

As mentioned earlier, miles can be redeemed at a value of 2 cpm, which gives specialised miles cards a "cashback" rate of 8%.

In contrast, most cashback cards award 8% cashback, and the few that award 8% only do so on very limited categories.

You could think of this result as the price you pay for the benefits of cashback as a reward.

Since you're receiving cash and you can realise its value immediately, it makes sense that you earn it at a lower rate.

Monthly Spending Requirement

This doesn't apply to all cashback cards, but it applies to high cashback cards that typically award 5% or higher cashback.

In order to be eligible to receive the cashback you're due, you need to first meet the monthly spending requirement for the card you're using.

High cashback cards often award a base amount of cashback for your spending (~0.3%), and bonus cashback for meeting specific criteria.

If you're not able to meet the spending requirement, you'll earn a measly amount of cashback instead of what you were hoping to earn.

This spending requirement is usually at $500/month or higher.

Unlimited cashback cards don't have any spending requirements, but that's because they award significantly lower cashback ranging from 1.5% ~ 1.7%.

My Pick: Miles

Personally, I've decided to play the miles game.

I enjoy travelling and I'd like to fly in business class, but I don't want to have to pay for it.

Miles provide me with a way to do exactly that.

I also enjoy that there is some complexity to earning miles and that it's gamified to some degree.

It makes me constantly want to look for ways to "hack" the process and learn how to best optimise my strategy.

It's basically what I used to do with video games when I was growing up, except now, there are tangible benefits to reap.

To summarise,

Miles have the potential to give you a bigger bang for your buck and save you from worrying about meeting any monthly spending requirements.

But the miles game is also much more complex with many things to consider.

And there's always a possibility that you don't get to realise the value that you were expecting.

Meanwhile, cashback as a reward is versatile and straightforward, and you get to realise its value almost immediately.

However, the price of these benefits is a lower reward % than miles and a monthly spending requirement.

Now that you know the key differences between miles and cashback, hopefully, you're able to make a more informed decision about which reward is more suitable for you.

Which type of reward do you prefer and why? Let me know in the comments below!