Cash Back vs. Statement Credit: Understanding the Difference

Editorial Note:

One of the most popular credit card benefits today is the cash back offer. When your credit card issuer says “cash back,” it’s used as an umbrella term for a group of sub-offers. The most common types are the statement credit and true cash back. How can you tell the difference? In this article, we’ll help you distinguish between them. This way you’ll know exactly what kind of deal your lender is extending.

Cash Back vs. Statement Credit: What’s the Difference?

Most times, your card gives you points for your purchases. These points may be acquired at $1 per point, or extra points may be awarded to specific categories. Points can be redeemed for a number of offers. Sometimes it is for goods or services from affiliate partners. Other times it may be for travel benefits like flights, or hotel credits, free nights, or discounts. Your credit card points can also be redeemed for financial perks, such as cash back and statement credits.

A true cash back offer effectively performs like a rebate. It gives the credit card customer a percentage of the purchase costs back to them. You can withdraw this money from your credit card account. The money leaves your credit card issuer’s system. You can spend it anywhere or save it in a different bank account.

With statement credits, your points are used to pay off a portion of your credit card bill. The points are assigned an equivalent dollar value, then transferred from the points (rewards) account to your credit card balance. The use of the cash is limited to within the credit card issuer’s system. It cannot be withdrawn, cashed out, or moved to an external bank account for use.

Is Cash Back Always the Best Option?

Whether or not cash back is the best option depends on the offers for the redemption of your points. We suggest you review all the available options before you make a decision. Sometimes you get lucky and find a high-quality benefit in the options. For example, credit card companies often have agreements with brands for specific products or services. You may get end up paying less for a brand name product if you purchase it with points. This is in comparison to buying from a retail store or the brand’s website.

You can use a simple technique to determine the best option to choose. What you will need to do is calculate the value of a point using cash back versus using another way.

Step 1: Divide the cash back you can get by the number of points you need to redeem. For example, let’s say you plan to get $20 cash back, and it takes 2,000 points. The value of the points is $20 ÷ 2000, or $0.01.

Step 2: Do the same thing for each reward option that you want to use. Consider a $100 statement credit that costs 100,000 points. The value per point is $100 ÷ 100,000, or $0.001 (1/10th of a cent).

In our example, the cash back offers the best value because 1 cent is larger than a 1/10th cent.

Decide Which Option Is Best for You

Both cash back and statement credit can be helpful, but the difference is in how they are used. Remember to analyze all options carefully before selecting your choice. Calculating the value of the offer by points helps show the value in mathematical terms that you can compare. This helps clarify which option gives you the better deal.

Roman Zelvenschi

I started a digital marketing agency Romanz Media Group Inc. 12 years ago. Running my own business quickly taught me the importance of cash flow. Making sales was not enough, I had to have money in the bank to pay the vendors, staff and personal bills.

During those early stages of the company I learned how to get creative with debt and to save on interest cost. I paid for everything I could with a credit card to both get more points and to extend the payment date by 25 days (credit card grace period). I then utilized a 0% balance transfer offers to rotate this debt.

I learned a lot during this process and made a lot of mistakes. My key lesson is that the most important part of being financially independent is how much I managed to save, rather than how much I earned. Staying disciplined with savings and tracking spending is not easy and I tried many different methods to stay on track.

FinancialFreedom.Guru is a side project where I and my staff are trying to share the practical knowledge on how to understand finances and to build wealth.

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