Guide to types of credit card rewards: Cashback, points and miles

If you’re searching for a credit card, chances are you have seen a wide variety of rewards rates ranging from cashback to points to miles (and sometimes, a combination).

Card issuers design attractive rates and bonuses specifically to appeal to new consumers, but the actual value of a credit card can be difficult to discern without a strong understanding of how rewards structures work.

We've created a guide to better explain different rewards types and to help you find which will provide the most value for you.

What's the Difference between Cashback, Points and Miles?

Cashback, points and miles rewards systems all provide value but vary in ease of redemption & flexibility.

• Cashback: Cashback rewards are by far the easiest to use rewards system. These cards–also known as rebate cards — return a fixed percentage of the expenses made using the card. These earnings are typically applied towards your credit card statement automatically to offset your monthly bill. Because of this instant application, cashback rarely expires. However, it’s worth pointing out that rebates can rarely be redeemed as actual cash vouchers or the like
• Points: Rewards points are fairly common, but are a bit more complicated to use. Points function similarly to discounts and coupons that can be redeemed at designated locations and services. The precise worth of the points vary from card to card, and actual value-to-consumer changes based on what the points are redeemed for. Points redemption values are typically highest when converted to miles, though they can also be exchanged for cash or merchant vouchers. Sometimes, redeeming points incurs an additional administrative or processing fee.
• Miles: Air miles are frequently offered by travel credit cards. While such cards actually tend to issue points, they are still considered miles cards because conversion to miles is simply assumed (and in many cases, conversion fees are waived). Converted miles  can be transferred to airline and frequent flyer loyalty accounts, where they can be redeemed to pay for flights. The worth of a mile varies based on flght duration and ticket class, typically ranging from S$0.01 to S$0.08. Redemption values are highest for longer flights and business class tickets.

Which rewards system is best for you?

Understandably enough, credit card rewards are only valuable if you use them. If you're a frequent traveller, you're most likely to benefit from a miles-earning card, while those who spend most of their time in Singapore would likely benefit more from a cashback card. This is the easiest way to quickly make your decision.

Nonetheless, you might also want to consider ease of use. Cashback cards are very straightforward, as rebates are automatically applied to your monthly statement.

Miles and points cards, however, require active effort to seek out rewards, make conversions, and sometimes deal with added fees and processing times.

Finally, cashback and rebate cards are more likely to have minimum spend requirements needed to access higher rewards rates. Most of the time, points and miles credit cards do not have minimum requirements, allowing cardholders to begin earning right away.

How to compare the reward rates of cashback & miles cards

Cashback and miles rewards can seem difficult to compare upfront. In order to compare them on a level playing field, it’s essential to determine their ultimate “value-to-consumer” — or, in other words, the value a cardholder ultimately receives after redeeming rewards for every S$1 spend on their card. This can be calculated in two ways, based on card type.

First, the return value of rebate cards is fairly simple to calculate. In every case, one per cent cashback on S$100 spend returns S$1 reward. This metric is true regardless of the advertised rewards rate, and applies to every cashback credit card.

Points and miles credit cards are a bit less simple, however. As miles are typically converted from points, this calculation is driven by point redemption values. First, determine how many points can be redeemed for a set amount of miles on the card’s specific rewards platform (conversions typically must be made in blocks).

Next, divide the number of miles by the number of points to find how many miles can be redeemed with just one reward point. Our research shows that one mile has a redemption value of S$0.01, so you can multiply the number of miles per point redemption to determine the value-to-consumer for each one point redemption.

Unlike with cashback values, point values vary from bank to bank. Ultimately, these calculations standardise value-to-consumer across different rewards types, making it easier to compare options with different rewards structures.

Selecting the best rewards card for you

Beyond considering rewards system type, it's essential to look at all the details of a credit card, from minimum spend requirements and annual fees to rewarded categories and extra perks.

The true value of a credit card, whether cashback, points or miles, comes down to the individual consumer's spending behaviour and how well that card's structure suits their needs.

ALSO READ: Best credit card promotions in Singapore (May to July 2024): Citibank, DBS, HSBC, UOB, and more

This article was first published in ValueChampion.