Should you choose a rewards credit card or a cashback credit card?

Feb 23, 2022

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There’s a large range of credit cards available in the UK, and the different options can be overwhelming. If you’re in the market for a new credit card, you might not know where to start.

Before delving into reviews of each card on TPG UK, you may first want to decide if you would prefer to collect rewards or cashback.

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What’s the difference?

Cashback cards earn you cashback on each purchase made with the card. So, if your card earns 2% cashback and you spent £5,000 on the card, you will receive £100 back by way of a discount on the balance of your credit card. In this example, you will owe £4,900 instead of £5,000.

Reward credit cards earn points that can have a different value based on which point currency you’re earning. For example, we think American Express Membership Rewards points are hugely valuable in our monthly valuations, while IHG Rewards points are worth much less. If you earn 1 point per pound spent on a rewards credit card, you will earn 5,000 points for spending £5,000. If the points are worth 1p each, then you would, in theory, receive a £50 value from the rewards points. So £100 cashback would be more valuable.

But let’s look at two different extremes. First, one person looking for a no-annual-fee card and spending £500 per month on the card (£6,000 per year) to compare good cashback vs. rewards card options. Second, the other person who is happy to pay an annual fee in order to earn more cashback/rewards because they are spending a much larger £5,000 per month on the card (£60,000 per year).

(Photo by Josh Gribben for The Points Guy)
(Photo by Josh Gribben for The Points Guy)

Example 1: £500 per month spend

A suitable cashback card for this situation might be the Platinum Cashback Everyday Credit Card from American Express. There is no annual fee and 5% cashback (up to £100 for the first three months of card membership) for the first three months and 0.5% cashback for up to £10,000 spent after that,1. Spending £500 per month for the first three months would earn you £75 and then £22.50 in total cashback for the remaining nine months, so just under £100 in the first year.

A good rewards card option given the limited monthly spend on the card instead would be the British Airways American Express Credit Card from American Express. This does not have an annual fee and comes with a welcome bonus of 5,000 Avios by spending £1,000 in the first three months of card membership, which would be achieved with £500 spending each month. You will also receive 1 Avios per £1 spent, so for £6,000 in purchases over the year, that would add up to 11,000 Avios.

TPG UK values Avios at around 1.1p each, so 11,000 Avios are worth £122.

For these two examples, assuming you will be able to use Avios rather than just straight cashback, you will receive more value from a rewards credit card than a cashback card.

Example 2: £5,000 per month spend

For someone spending this much money on a card every month, it is worth considering a card that comes with an annual fee but has a more lucrative reward or cashback structure than the no-fee cards in example one.

For a cashback card, the Platinum Cashback Credit Card from American Express has a £25 annual fee, but offers 5% cashback up to £125. However, as of 4 August 2021, the earn rate on the card will be changing to offer 0.75% cashback up to £10,000 after that and 1.25% for cashback above that.

Spending a large £5,000 on the card every month, that person would receive the full £125 for the first three months, 0.75% for the next two months and 1.25% for the seven months after that. In total that would be more than £550 less the £25 annual fee.

That’s an impressive return for a card with a low annual fee.

But what would the numbers look like for a rewards card instead? A good option with this spending power might be the British Airways American Express Premium Plus Card. While it does have an annual fee of £250, it also comes with a welcome bonus of 25,000 Avios for spending £3,000 in the first three months, which this person would hit in a month.

The card earns 3 Avios for every £1 spent with British Airways or BA Holidays. Let’s say this person spends 20% of the year’s purchases with British Airways, so £12,000. They would earn 36,000 Avios for this spend. The card also earns 1.5 Avios per £1 spent elsewhere, so 67,500 Avios for the £48,000 spend. They would also quickly earn the valuable British Airways 2-4-1 Companion Voucher, which can save thousands if used correctly.

In total, that is an impressive haul of 128,500 Avios for the year spending £5,000 a month on this card. Based on TPG U.K.’s valuations, those Avios are worth £1,435, far less the £250 annual fee.

In this scenario, this person should earn about twice the amount of value collecting points rather than cashback.

Related: The ultimate guide to British Airways Avios

Photo by Nicky Kelvin / The Points Guy
(Photo by Nicky Kelvin/The Points Guy)

Bottom line

Each person’s situation will be different, and these are two extreme examples of spending behaviour. Nonetheless, in both these examples its should be about twice as valuable to collect rewards points rather than cashback.

If you’re considering a new card, it’ll be worth doing the maths to ensure you’re extracting the maximum value from your purchases.

Featured image by The Points Guy

Editorial Disclaimer: Opinions expressed here are the author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

Disclaimer: The responses below are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.