My Personal Finance Journey

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Cashback vs Reward

Contributed by mm | April 5, 2004 7:42 AM PST

I started the day checking out CitiBank's new offer: Citi® Home Rebate Platinum Select® MasterCard®. Users of this card is entitled to 1% cash back on all purchases in the form of an annual check sent directly from CitiBank to their mortgage companies. It is a good marketing try for Citi: they can have access to customers' mortgage information, and, plus, Citi can lower its credit risk because it is pretty much assured that the associated equity in the mortgage can be used to pay off credit card.

But this is not the thing I want to discuss in this post. What I want to address is why this kind of reward cards ever exists and they are amassing a growing number of users.

When it comes to choose between a 1% cashback card and a 1% reward card in whatever forms (whether it is mortgage principal repayment in the above case, or a $25 Amazon.com, L.L. Bean or Kroger coupon), I always pick up the 1% cash back. Why? Because one should not rely on banks to tell you how to use your money. With the same 1% cashback, one can choose Overstock.com instead of Amazon.com, choose Sports Authority instead of L.L. Bean, or choose Safeway instead of Kroger. One can also use the cashback to pay off credit card debt, or simply add to one's retirement fund.

In my mind, no one should choose a reward card if it only pays out 1% in coupons or other forms. Among the cards I have come across in different times, I will recommend ShareBuilder Visa Platinum if you opt for a 1% cashback, which sends $25 cash to your ShareBuilder brokerage account for every $2,500 accumulated purchase. You don't need to wait for the year-end to receive your check of rebate and actually you don't have to use the ShareBuilder brokerage service -- the account is free of maintenance free and you can always transfer out the $25 cash to your checking accounts electronically for free.

The other choice is MBNA WorldPoints reward program, which has a $200 payout if you accumulate 20,000 points (1 point = $1 purchase; sometimes double point bonus applies), or you can redeem 5,000 points for $40. Plus, the reward program also allows you to redeem by air tickets (25,000 points for a roundtrip trip within continental 48-states), merchandise, or some of the adventure-type travel packages.

The point I want to make is: a wise consumer should not settle for a 1% reward card that stricts one's way to spend the reward. One can gain much more flexibility for a cashback card instead. Never allow the banks to tell you how you should live your life!

(Disclosure: I will not have any commission recommending the above cards to you, but if you find this information helpful, you can help this site and its sponsors by trying out the advertisers in the banner ad.)

This Post Has Received 3 Comments. Share Your Opinions Too.


Andy Commented on September 25, 2004

This is a situation where the reward is better. I was able to turn my $40 cashback from Discover into a $80 voucher at Sharper Image. When I purchased an item, the cashier gave me change in cash for the difference between the item's cost and the voucher. Therefore, any purchase under $40 would result in me having more cash (plus some trinket) than if I'd just taken the cash outright. The caveat is that this cashier may have erred and the store policy might be different.


Jamie Commented on March 13, 2005

I don't see ANY reward card able to beat the 5% cash back cards from citibank. Why? because I can purchase store gift cards at supermarkets and earn the 5% cash back! That's like 5% back on almost anything you buy--cloth, electronics, as long as you can buy the store's gift card from a supermarket!


sam Commented on March 25, 2005

The problem with the cash back card is that it is capped. I have put major expenses on my reward card and gotten hundreds of dollars in coupons. Amazon.com sells everything and in most cases at the best prices anywhere so it gets my vote for best reward card.


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