Smart Money Podcast: ‘This or That’: Travel Credit Card or Cash-Back Credit Card
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Welcome to NerdWallet’s Smart Money podcast, where we answer your real-world money questions.
This week’s episode is part of our new series called "This or That," where the NerdWallet Travel team compares different ways to travel.
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Travel credit cards generally earn points that you can redeem for travel, while cash-back credit cards earn cash that you can often use toward your next credit card statement. For people who want simple, straightforward rewards, a cash-back card offers more flexibility to redeem for almost any kind of purchase. Cash-back cards often have low or $0 annual fees, so cardholders do not have to be as diligent about using benefits in order to justify the cost of holding the card.
Travel credit cards, on the other hand, often do have an annual fee, but they usually have more perks as well. In addition to earning more points on certain spending in categories like travel or dining, travel credit cards may come with free hotel night certificates, automatic elite status, airport lounge access, credit toward TSA PreCheck or Global Entry application fees, and more. If you travel frequently and intend to use a lot of the benefits, a travel credit card — even with an annual fee — could make sense for you.
To determine which type of card is right for you, be realistic about how much you plan to travel, and use one of NerdWallet’s calculators (like this one) to determine whether the card would be worth its annual fee.
Keep in mind that you could have both types of cards if that fits within your budget and you want to maximize your rewards.
Know yourself: If you’re optimizing every benefit — for instance staying at a hotel on a free night certificate that would otherwise cost $500 — and you transfer points like a pro, a travel card is probably better. But if you want to keep it simple, a cash-back card is A-OK. Also, there’s nothing wrong with having both!
Shop around: There are dozens of cash-back and travel credit cards. Check out the NerdWallet site for up-to-date reviews to make finding the right one for you easy.
Make the most of your cards: No matter which one you go with, make sure you’re maximizing your value by using all available benefits — especially if your card has an annual fee.
More about points and miles on NerdWallet:
Have a money question? Text or call us at 901-730-6373. Or you can email us at [email protected]. To hear previous episodes, go to the podcast homepage.
Sean Pyles: Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius Nerds. I'm Sean Pyles.
Today, we have the next installment in our "This or That" Travel series. Today's question: Travel credit card or cash-back credit card? After last week's deep dive into points, you might be ready to apply for a shiny new travel credit card, or you might be thinking all of that sounded way too complicated. Should I just keep it simple and get a cash-back card instead?
To help you choose your next card, we have Sally French joining us today. She's a travel writer, and you may also recognize her from some of NerdWallet's video content. Sally, thank you for being here.
Sally French: Thanks for having me.
Sean Pyles: Before we get into this conversation, a quick disclaimer that we're going to talk about a few credit cards in this episode that are NerdWallet partners, but that does not affect how we talk about them.
Sally, I know you are really into travel credit cards, but I am team cash-back card. So if you want to convince me to change my ways, your work is cut out for you in this episode.
Sally French: Well, I will be honest with you: Cash-back cards are great, and I use cash-back cards for a lot of my everyday spending myself, so even though you have a cash-back card, that's not necessarily a bad thing. But I will tell you that if you want to travel and live the high life, you should at least consider at least also having a travel credit card.
Sean Pyles: Yeah. They're not mutually exclusive. You can have plenty of cash-back and travel credit cards if you can handle them responsibly, but we'll get into that later on. Let's start with the basics. Can you outline the difference between a travel credit card and a cash-back credit card?
Sally French: I'll start with the cash-back credit card because it's exactly what it sounds like. You earn cash back for spending that you are doing on that card. Back in the day, it was pretty common to earn 1% back on your spending, which isn't bad. You spent $100 and you get $1 back from your bank in cash-back rewards. These days, it's pretty common to see cards that offer 1.5% or even 2% or more on your purchases.
On the other hand, you have travel credit cards. These typically earn not cash back, but rather points. You can then use these points to redeem for travel.
And within travel credit cards, there are two types of categories. There are cards that earn sort of general travel points, which are often tied to a bank. That's something like Chase Ultimate Rewards or American Express Membership Rewards. And these can then be used to book travel across a myriad of different issuers. But then on the other hand, you might have a travel credit card that's tied to a specific brand, like a specific airline or a specific hotel. These will earn points or frequent flyer miles, which you then use to redeem for travel with those brands.
Sean Pyles: And from that answer, I think it's clear that cash-back cards are a lot simpler. You just get cash back — a percentage based on your purchases. And travel credit cards put you into a whole different economy of points and miles and everything else to try to maximize what you're getting from them to score a nice vacation, hopefully.
Sally French: You're totally right, Sean. For someone who doesn't want to make things super complicated, they just want to know pretty much for everything that I spend, I spend $100, and I can get $1 to $2 back, which I can just put towards my next credit card bill. That's totally easy, totally straightforward.
The reality is that travel credit cards can be sort of a part-time job for a lot of people. When you see these people who are staying in these over-water bungalows in Bali on their travel rewards, you have to realize that those people are also putting in an enormous amount of effort to transfer those points to the right programs, in which case, it's not for everyone. It really is a part-time job to sort of maximize their points for their best value. So for a lot of people, there's nothing wrong with cash-back cards. You get a great rewards rate for the spending that you're doing.
Sean Pyles: For sure. But you're really into travel credit cards. Can you talk about what the appeal is for you?
Sally French: Yes. Well, so I mentioned that you can earn spending rewards, and travel credit cards have a range of rates. Typically, they'll offer you elevated points on your travel-related spending. If you have a travel credit card tied to a specific hotel or airline brand, you'll typically earn just crazy amounts of points for spending on those travels. Their travel credit cards offer bonus points on related areas like dining.
But earning points is only the half of it when it comes to travel credit cards. Travel credit cards come with all of these other benefits. And typically, the higher in annual fee the travel credit card, the higher the benefit. So it's pretty common that pretty much all travel credit cards, whether or not they have an annual fee, will offer no foreign transaction fees. That's a nonnegotiable to me in recommending a good travel credit card. And it's wild how many people go abroad, and they're paying these foreign transaction fees, which can often be 1% to 3% of your entire purchase.
Sean Pyles: Yeah. Although, Sally, I will say, my cash-back card that I love does also offer no foreign transaction fees.
Sally French: OK. That's a good benefit. I'm into it. But the benefits to travel credit cards can often go so much further. It depends on the card, but we typically see lots of other benefits. If it's tied to an airline, you might get free checked bags. And if you're someone who's paying that $20, $30 checked bag fee and you fly multiple times a year, you're flying round-trip, you're flying with multiple people with checked bags, that alone can pay for the annual fee.
Sean Pyles: OK, because here's the thing for me, I never check a bag. I don't want my bag to get lost. I even stick an AirTag in it, even though I have it with me all the time. So I think what I'm hearing from you is that if you are a travel maximizer, you're going to bring the big bag, you want to go to the crazy locations, then the travel credit card is probably a better bet for you.
Sally French: Yeah. I don't check bags either, but there are so many other benefits as well. You look at things like hotels, and many hotel credit cards that have annual fees of about $100, it's pretty common to find credit cards that have a free hotel room night certificate. NerdWallet outlines which credit cards actually offer that. And typically, there are some limitations of the free hotel room night, but I've always redeemed my hotel room night certificates at hotel rooms that would otherwise be $200 or $300.
Sean Pyles: OK, that's pretty nice.
Sally French: When you paid a $100 annual fee for a hotel room that you otherwise would've paid $200 for.
There's other benefits like TSA PreCheck. And if you travel with any frequency, I always recommend getting TSA PreCheck. In fact, if you're listening to this podcast right now and you don't have it, you should just turn it off and go apply right now. I can't travel without that.
There's lounge access, there's credit card travel insurance, there's rental car insurance. And of course, the benefits of every travel credit card vary, but it's not uncommon to find those things. And once you start to calculate what those things are really worth, they far outweigh the annual fee of the card.
Sean Pyles: We've got to go back to the idea that you do have to calculate things, and that's in part to determine whether an annual fee is worth it. And a lot of folks simply will not want to do that math.
Sally French: Yes. And calculating is so important. Also, you have to factor in the opportunity cost. And so I hear a lot of people say, "Oh, this card has a $100 annual fee, but it earns 3% back on dining, as opposed to the no-annual-fee card that only earns 1%." But you sort of have to figure out the opportunity cost of, you're still not earning that 1% and not paying the annual fee. Likewise, with a credit card that has maybe a $100 annual fee, let's go back to that hotel example, it's really easy to say, "Hey, I booked a $200 hotel room using this credit card, and the credit card's annual fee was only $100, so that was definitely worth it," assuming that's a hotel you would've paid for in cash anyway.
Where it starts to get tricky is when we start to go into these realms of credit cards where their annual fees are $400, $500. There's some credit cards that are really common and they're teetering in the $700 range. NerdWallet has calculators on its website that can help you add up if the benefits are worth it for you.
Some of these benefits can be really complicated to use, just burdensome. There's a few credit cards out there that'll offer a monthly Uber statement credit, but it's doled out as $10 a month. It's not just $120 at once. NerdWallet has calculators that can help you really understand. How often are you actually going to use that Uber benefit or whatever benefit is out there on your credit card?
Sean Pyles: Yeah. And you mentioned that calculator that NerdWallet has. We will have a link to that in the show notes post for this episode. You can find that at nerdwallet.com/podcast.
Another thing I wanted to mention is that there are actually two tiers of the cash-back card that I have, one that has an annual fee and one that does not. And I should say that in addition to being lazy with my credit cards, I'm also cheap, and I do not want to pay an annual fee for a cash-back card because the benefits of the paid version with the annual fee are not that much better in my opinion. How do you think about that equation, Sally?
Sally French: Yeah, definitely. I mean, you can get really nerdy with it, and you can use NerdWallet's calculators to help you really understand. Are you getting out-sized value, even if you're paying for the annual fee?
But the reality is, you're still going to have to put the annual fee down at some point. And that's space in your budget that you're going to have to create. The challenge with annual fee credit cards is that you also have to sort of anticipate that you're going to do this spending. So in reference to the Uber statement credit, you might think, yes, I take Ubers every single month. But what if you spend a month abroad at country that doesn't have Ubers? Then you've lost that. And so you think you've done this calculation, and then life happens.
I personally pay more than $1,000 in credit card annual fees because that's money that just goes to money that I would've spent on travel anyway. But there's absolutely nothing wrong with you saying, "You know what, I'm not going to pay annual fees," and realizing that you're making this sacrifice that you might not get the best travel benefits, but you're not also having this feeling of being on the hook to justify that annual fee.
Sean Pyles: Yeah. When people are trying to figure out whether they want a cash-back card or a travel credit card, a lot of it comes down to what kind of benefits you're getting. And cash-back can seem a little simple or maybe boring, like oh, I'm just getting money back for my groceries or something. But I actually take a bit of a different approach. I like to save up my cash back until I have a couple hundred, maybe $300, which can take a while to build up, and then use that on something, usually an electronic item that I wouldn't want to spend money for. I bought some fancy Apple headphones, and that way, I feel like I'm really getting a special treat with all of my cash-back money.
Sally French: Yeah. And there are plenty of people who don't make room in their budgets to travel, but we all want to have that nice little treat, as you mentioned, whether it's travel, or whether it's an electronic. If you're someone who doesn't have room in your regular budget to purchase those things, I sometimes find that forced savings accounts that comes with cash-back rewards is really nice because then, you're right, once you accumulate that $300, then you can kind of treat yourself with something you wouldn't otherwise have room for.
And then again, you do have the people who just automatically get small payments deposited in their accounts every month, so maybe they're only getting $10 back in rewards every month. But that's $10 towards rent or whatever other important expenses you have. And anything you can do to bring those expenses down for a lot of people is really important.
Sean Pyles: Right. Sally, you mentioned that some cash-back cards earn 2% back. How does the earning rate on a cash-back card compare to travel credit cards? Is there a comparable percentage rate?
Sally French: These travel credit cards are not earning a fixed cash rate. They might earn something like three points per dollar spent on dining, but that's not necessarily 3% back. That's not $3 on a $100 restaurant bill.
Many of these travel credit cards let you book travel in their own portal. And typically, the higher the credit card, the more valuable the points are. So if you look at a credit card like those from Chase, some of the $0 annual fee cards will earn Chase Ultimate Rewards® points that can be redeemed in Chase's travel portal for one point per one cent. But then, there are some of the more elevated credit cards that have higher annual fees, and those points become worth 1.25X or 1.5X their value as what they would be on the $0 annual fee card. So there is a benefit to having those higher annual fee cards.
Sean Pyles: Yeah. Well, those numbers are making my head spin a little bit. But I will still let you try to sell me on the travel credit cards. What do you think is an underrated benefit of these credit cards?
Sally French: Yes. Well, there is the one that I mentioned earlier, is TSA pre-check or global entry.
Other things, like having that airport lounge access, I would never pay the one-off admission to enter airport lounges, which could typically be $50. I'm the person who's just packing my own PB&J from home. But that said, now I have airport lounge access, and I remember distinctly there was one time where my flight was delayed three hours. And I'm usually a very fast mover, high-anxiety person, and if my flight was delayed for three hours, my whole day would be ruined. But I was sitting in this amazing lounge, and I was really focused and productive on my work. I found out my flight was delayed and I was like, "Great. Now I have another free meal in the lounge. I'm going to have another coffee. I'm being really productive. Awesome, so relaxed right now. This is great. I do not mind my three-hour flight delay." And I find that credit cards, especially travel credit cards, offer these sort of unexpected benefits that can make your trip so much better.
Sean Pyles: Yeah. So the annual fee bought you peace of mind in that moment.
Sally French: And you cannot put a dollar sign on that.
Sean Pyles: Yeah. But travel credit cards also offer travel insurance. Can you talk about that too?
Sally French: Yes. Travel insurance is another really underrated benefit. And again, this is something that I often do not pay for myself. I know a lot of people who have these big-ticket once-in-a-lifetime trips probably do purchase travel insurance. We saw big upticks in travel insurance purchases, especially around the COVID pandemic when borders were opening and closing, and everything was so unpredictable. But the reality is, I see that as an extra expense that I have a really hard time paying for. So what's great is many travel credit cards, those with and without annual fees, will offer travel insurance for trips paid for on that credit card. Typically, the higher the annual fee card, the more coverage or the better quality travel insurance you'll get.
Of course, check with your policy to understand what is and isn't covered because they all have various terms. But typically, if you've booked a trip, you paid for it on that credit card, suddenly a hurricane comes in and you have to spend an extra night on some island, then your travel credit card will actually reimburse you for that extra hotel room, that night's stay. Again, check your terms. Make sure what's covered. But this can really save you in a pinch.
Sean Pyles: OK. Well, let's also talk about some of the perks that cash-back cards have. And they may not be as glamorous as things like travel insurance, but they can help you with more everyday occurrences, which is more in accordance with how you use travel credit cards anyway. And one that I'm thinking about here is cell phone protection. Can you give us a rundown of how that works?
Sally French: Yeah. Not every cash-back credit card offers this, but this is a benefit that I'm seeing increasingly often. If you pay your cell phone bill on that card, I'm seeing more and more cards that will offer cell phone insurance. So if your screen cracks, again, they have various terms about what is covered. You probably can't just chuck it into the ocean and then get a brand new one. You might have to pay some sort of co-pay type fee. And again, NerdWallet has tools on its site to help you understand which credit cards have cell phone protection. But these types of benefits are becoming increasingly common as the credit card space becomes more crowded.
Sean Pyles: OK. So I can see how a lot of people might be thinking that cash-back cards sound good, and travel credit cards also sound pretty good. And they might be kind of indecisive. And the good news is that as we said at the outset, people can have both. Right?
Sally French: Yeah. So Sean, we sort of position this as “this or that,” but you don't have to choose. You can have both, and the reality is I have both. In fact, Americans on average have three credit cards and 2.3 retail or store credit cards. That's according to a 2021 report by Experian. And so you can certainly have a few credit cards.
I have a great cash-back card that gets me a great rate on all of my everyday spending. And then I also have travel credit cards, which I typically only spend when I'm actually staying with those brands. When I'm on the airplane, I flash that credit card and I get my benefit like my free Wi-Fi. And then I make a few additional purchases on that card each year. But by and large, you can have multiple credit cards, and the reality is there are some people out there who have 20 or 30 credit cards.
Sean Pyles: Yeah. But it might not be a good idea to load up on a bunch of new credit cards all at the same time. If someone is deciding to choose one right now, a cash-back card or a travel card, what do you think they should be considering if they're going to choose one or the other?
Sally French: That's absolutely true, Sean. You don't want to just be applying for a million credit cards all at once. They can have a temporary negative effect on your credit scores. And some banks will actually sort of limit how many credit cards you can get approved for in a year.
That said, if you're deciding between a few credit cards, I would look at your spending. If you are someone who is spending a bunch on travel this year, then it might make sense to get at least a general travel credit card. And then if you're someone who spends often with a particular travel brand — so maybe you travel for work and you take the same exact flight once a month, it's always on United — then maybe you go ahead and think about getting that United credit card. And maybe you visit your family four times a year, and you don't want to stay with them, but they live next door to a Hilton Hotel, then it might make sense to have that Hilton card if you can really commit to that travel brand.
Then again, if you're someone who doesn't really know what your travel plans are looking like this year, it might just make more sense to have that cash-back credit card, especially if you know you have spending happening across the board and you just want to get that solid cash-back rate, that can certainly make sense.
Sean Pyles: Got it. OK, Sally, thank you for covering all of this ground for us today. Can you give us your takeaway tips, please?
Sally French: Yeah. First is just to know yourself. If you're someone who's optimizing every benefit, where you stay at the hotel on the free night certificate that would otherwise cost $500 a night, and you're willing to transfer those points and put in the work calculating them, then travel is probably better. But if you want to keep it simple, Sean, and I know that's you, then cash back is A-OK. There is nothing also wrong with having both.
Second, shop around. There are dozens of cash-back and travel credit cards. Check out NerdWallet for up-to-date reviews to make finding the right one for you easy.
And my third and final tip is to make the most of your cards, no matter which one you go with. Always make sure that you're maximizing the value that it offers by using all of the available benefits that you can, especially if your card has that annual fee.
Sean Pyles: Great. Well, thank you so much for talking with us today.
Sally French: Thanks, Sean.
Sean Pyles: And that is all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]
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This episode was produced by Meghan Coyle. We had editing help from Tess Vigeland. Kaely Monahan mixed our audio. And a big thank you to the pros on the NerdWallet copy desk for all their help.
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