May 27, 2021

Why Cash Back Cards are (Mostly) A Waste of Time

Credit card points are one of the best perks about being an entrepreneur. By virtue of just running a business, you can rack up points to fund some amazing personal vacations or business travel.

We’ve spoken with a lot of entrepreneurs over the years about their businesses, where they spend their money, and how they’re making the most of the credit card points game.

One of the things we were surprised to learn is just how often they use cashback or even debit cards.

We’ve typically heard about four reasons why somebody would use cashback or debit cards:

  • They want something simple, and 2% cashback is simple.
  • They didn’t know they could be getting more value by traveling.
  • The points game is too complicated.
  • They don’t like to travel.

Cashback cards definitely have their place, but if you’re wanting to go on an amazing vacation (while retaining some of the benefits of cash back), you’re better off using a travel rewards card. I’ll break down why here and show you the opportunity cost of using a cashback card instead of a travel card. It’s often far higher than you’d expect. I’ll also discuss why you shouldn’t defer to blogs telling you that certain points are worth a certain amount of money.

If You Like To Travel, You Need A Travel Rewards Card

Cash-back looks better in many cases if you don’t factor in transfer partners and travel perks.

Getting that 2% cashback is easy, but if you’re taking that 2% and purchasing travel with it, you’re getting significantly less value than if you had a rewards card and transferred out to an airline or hotel.

A lot of people make the mistake of researching the “cash value” of different points cards and figure that’s that when it comes to the value of points. These cash valuations are often subjective and take into account neither how different transfer partners treat points nor transfer bonuses nor travel perks. (More on that below.)

The Opportunity Cost of Cashback Cards

Let’s say you’re an ecommerce entrepreneur and spend a combined $60,000 per month on shipping and Facebook Ads.

What are you giving up by using a cashback card instead of a rewards card?

If you put these purchases on a Capital One Spark card, you’ll get 2% cash back, which would be a total of $1,200 each month.

If you had used the AmEx Business Gold card instead, you’d get 4 AmEx points for every dollar spent, which would be 240,000 AmEx points. That’s enough points to book two, round trip, flight class flights from Chicago to Tokyo on ANA after you transfer them to Virgin Atlantic Flying Club, or 16 round trip economy flights from Dallas to Florida if you move them into British Airways Avios..

At the time of this writing, those 2 tickets are  for sale on Google Flights for over $47,000. So your cashback card is costing you the equivalent of those $47,000 tickets.

You could also transfer those points to over a dozen airlines, such as British Airways or Virgin Atlantic, whenever they have a 30% transfer bonus active, giving you another 72,000 points for free, bringing you to 312,000 points.

Let’s say you skipped the transfer bonus and just received the 240,000 points.

Depending on the card you used, those are two of your options.

You could get $1,200 cashback... or take a memorable trip to Japan for two, in first class, on one of the top airlines in the world.

Or travel roundtrip from Texas to Florida 16 times, if that’s what you’d rather do. And that’s to say nothing about what you miss out on in terms of hotel stays.

Value Per Point Calculations

A lot of travel blogs enjoy talking about the value of points, like saying Chase points are worth 1.7 cents/point, AAdvantage points are worth 1.4 cents/point, and so on.

Points value calculations you see online are subjective - they’re different depending on who you ask. They also don’t really take into account transfer partners or award charts, and are better thought of as a relative ranking system to rank different cards against each other. They aren’t super helpful unless you know your specific travel goals.

Let’s figure out what the objective value/point would be if we were willing to pay the cash price of the first class tickets (although let’s be real, neither of us would really pay that).

What about when booking the above trip?

Well, every dollar you spend on ads/shipping the AmEx Business Gold results in 4 Membership Rewards points. Transfer those points to Virgin Atlantic, and then book that ANA itinerary using those points.

$60,000 spend turns into 240,000 points, which covers those 2 roundtrip tickets (excluding some airline fees). The sale price of those tickets is $47,115. To get the value per point, take the sale price and divide by the number of points, then multiply by 100.

47,115/240000*100 = 19.63 cents/point in value

To recap, using a 2% cashback card gets you 2 cents for every dollar you spend, but using the above itinerary, you would get nearly 20 cents (10x as much) of value by redeeming for the Japan trip.

So, to put it in dollar/cents terms, you lose about 18 cents for every dollar you spend on a cashback card rather than a travel card like the Amex Business Gold.

Maxing Out Your Multipliers

But what about after you hit the $150,000 limit on 4x points and go back to only 1 point per dollar spent?

When that happens, and you’ll make just 50k points per month, it definitely becomes less powerful. But 50k points is still about what it takes for a one way ticket to Paris on Air France, and that’s before the 30% transfer bonus from AmEx to Flying Blue (65k points).

But you don’t need to settle on that 50k/month limitation. There’s a solution: ask for more cards.

While out to lunch with my rep at Chase, I mentioned that I had shifted all of my adspend to my AmEx Business Gold after hitting the Chase’s $150k cap. He was surprised and said he could get me another Ink Preferred card, but I wouldn’t get a signup bonus.

I was totally cool with it, and a week later and a second Ink Preferred card. I pulled this same maneuver with my AmEx rep, but had to fill out some additional paperwork and received an additional Gold card several days later.

So, you can actually get multiple of the same business cards for the same business. Once you get to a certain level of spend, these credit card companies assign you representatives to help you. Use them.

The Cashback Cards We Do Like for Business and Personal

Whenever a client signs up for one of our plans, we go through the current cards that are available and send over personalized recommendations.

Some clients already have the rewards cards, and have maxed out their multipliers.

Since the COVID-19 pandemic, more clients have become interested in getting cash back so they can pay for things like home repair, gym gear, crypto, or getting new equipment for work. Some aren’t interested in traveling for a while.

In all of those cases, cash back cards can make sense. Below are some of the cards we recommend most.

Recommended Business Cashback Cards

Capital One Spark Cash

The Capital One Spark Cash is a straight 2% cashback card. You’ll get $0.02 back for every dollar you spend.

Chase Ink Unlimited

The Chase Ink Unlimited is a cashback hybrid card - it’ll give you 1.5 ‘points’  for every dollar you spend.  You have two options on using those points.

  • You can take the straight $0.015 cashback for each point.
  • If you have another Chase card that earns Ultimate Rewards, you also have the option of converting each point to an Ultimate Rewards point instead of cash.

AmEx Blue Business Cash

The AmEx Blue Business gives you 2% cash back on all purchases, up to $50,000 per calendar year. After that, it’s just 1% cashback.

Recommended Personal Cashback Cards

Citi Double Cash

This is an interesting 2% cashback card - you get 1% cashback when you spend, and another 1% once you pay off your statement.

Like the Chase Ink Unlimited, you can convert that ‘cashback’ into Citi ThankYou points, giving you 2 points for every dollar you spend. This is solid, since personal cards typically only offer 1 point per dollar on purchases that aren’t in special categories like gas, wireless, and restaurants.

Chase Freedom Unlimited

This card gives 1.5% cashback on every purchase, but it’s also one of those hybrid points that allows you to convert to Chase Ultimate Rewards points. Also gives you 3% cashback points at restaurants and 5% for travel when using the Chase travel portal.

Not quite as good as the Citi Double Cash above, but Chase is a better loyalty program with better transfer options.

Amazon Prime Rewards

This is worth looking into if you spend a lot on Amazon or Whole Foods. You’ll get 5% cashback at those 2 outlets, another 2% on restaurants/gas/drug stores, and 1% on everything else.

Bonus :  Convert AmEx Points to Cash

AmEx Platinum Schwab

The AmEx Platinum Schwab became pretty famous among ecommerce entrepreneurs in 2020 for allowing people to convert their AmEx points into cash - each AmEx point could be converted to  1.25 cents when you have this card.

When you combine the AmEx Gold Business card with big spending, no travel,  and spending a lot of time at home, you begin to see the appeal of the Schwab card.

With a 4x multiple on shipping/advertising, and then converting to cash, it effectively works out to be a 5% cashback card:

  • $100,000 in expenses at a 4x bonus
  • 400,000 points * 1.25 cents = $5,000
  • $5,000 is 5% of $100,000

We’d like to thank our friend Brett Haney at Microfiber Wholesale for this trick.

That all being said, cashback should be a relatively small part of your wallet if you enjoy traveling. You can get a lot of the perks of cashback cards without the opportunity cost of missing out on excellent travel and travel perks

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