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Recently, Citi made a splash in the market for cash back reward credit cards when it released its new Citi® Double Cash Card – 18 month BT offer. This card offers customers 1% cash back on all purchases at the time of the transaction, and another 1% cash back when the charge is paid for. For those who pay each month's statement balance in full and on-time, this reward program is indistinguishable from a system that offers 2% cash back. In fact, it is now the only personal credit card that directly offers 2% cash back on all purchases with no annual fee.
How Double Cash is Different
In the past, the Schwab brokerage offered a credit card that featured 2% cash back deposited in an investment account, but that card is no longer available. Fidelity Investments offers an American Express card that offers 2% cash back, but also as a deposit into a qualifying brokerage or investment account. By going to a direct 2% cash back, without any limits or annual fee, it is fair to say that Citi has upended the market for cash back reward cards. To put this in perspective, Capital One was seen as breaking new ground last year when it began offering 1.5% cash back on all purchases with no annual fee, but now Citi has bested them by a third.
How This Changes the Reward Credit Card Market
Every time someone uses a reward credit card that earns points or miles, they have to ask themselves if these rewards will be better off than receiving 2% cash back. For example, the Southwest Airlines Rapid Reward card returns one point per dollar spent on most purchases, and each point is worth just 1.4 cents each toward flights in their lowest fare class. Now, it makes more sense to use the Double Cash card to earn 2% cash back rather than airline rewards worth 30% less. Cardholders could then use their cash rewards to pay for anything, including purchases of new tickets with Southwest. In doing so, cardholders will come out ahead while earning additional rewards from both the purchase of the ticket, as well as from the flight itself.
The task of choosing the best reward credit cards becomes more complicated to holders of airline and hotel credit cards. The value of the points and miles that these cards offer depends on what cardholders are able to redeem them for. When airlines and hotels severely restrict the availability of award flights and hotel nights, the value of these points plummet. Likewise, many of these programs have been steadily devaluing their rewards by increasing the number of points and miles needed.
The result is that cardholders often receive travel services valued at far less than 2% of their spending, but significantly more in some cases. The difference depends on the program, but also on whether or not cardholders can be flexible and book their awards in advance. And when it comes to the trick of getting the most value when booking airline rewards, the skill and patience required of cardholders should not be discounted.
The average reward credit card holder will probably be better off earning 2% cash back on their regular spending, and leaving the points and miles to those who enjoy playing the game.
*Editorial Note: This content is not provided by Citibank. Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by Citibank.
*The content in this article is accurate at the publishing date, and may be subject to changes per the card issuer.