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Q: What Does Exercising Mean?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Q: What is a cashless exercise in options?

Also called the 'same-day sale,' a cashless exercise is when an employee exercises their stock options via a short-term loan provided by a brokerage firm.

Jul

2022

Exercising in Options? What Does It Mean & When to Exercise

By Laurel Tincher | Growing Wealth, invest, Investing | Comments Off

Investors in stock option contracts have the right to buy or sell underlying stocks (or other assets) at a predetermined price within a certain time period. When an investor decides they want to take action on their right to buy or sell, it’s called exercising. There are a number of ways investors can choose to exercise their options contract, depending on their individual goals and financial situation.

Option contracts are complex investment vehicles. They’re a multi-faceted tool that involves precise timing and are backed by lots of strategizing. While options are not for all investors, if handled by experienced traders, options could add diversity to a well-diversified portfolio.

In this article, we focus on the concept of exercising in options. What does it really mean to “exercise an option?” And how do you do it?

What Does Exercising Mean?

Exercising a stock option means that a trader purchases or sells the underlying stock associated with the options contract at the price set by the contract, which is called the strike price. This price may differ from the current market price of the stock.

Options contracts are valid for a certain amount of time. So if the owner doesn’t exercise their right to buy or sell within that period, the contract expires worthless, and the owner loses the right to buy or sell the underlying security at the strike price.

There is also an upfront fee, called a premium, that gets paid when a trader enters into an options contract. If the trader doesn’t exercise the contract, they forfeit that fee along with any other brokerage fees. Most options contracts never get exercised. Some contracts are sold instead of exercised, because the contract itself has value if it has the potential to be exercised later.

There are two main choices of types of options contracts, call options and put options. Purchasing a call option gives traders the right, but not the obligation, to purchase the underlying security at the strike price. Selling put options gives traders the right to sell the underlying security at the strike price.

Each contract is different, and there are also different types of options. American-style options let traders exercise them prior to the contract’s expiration date, while European-style options can only be exercised after the expiration date.

How Do You Exercise an Option?

Generally, traders have several choices when it comes to exercising their stock options. When a trader is ready to exercise an option, they can let their brokerage firm know. The broker will create an exercise notice to the Options Clearing Corporation (OCC) to let the individual or entity buying or selling the underlying stock know that the trader wants to execute a trade on a particular date. The option seller is required to fulfill the obligations of the contract.

The OCC assigns the exercise notice to one of their clearing members, which tends to be the trader’s brokerage firm. The broker then assigns the option to one of their customers who has written an option contract that they have not yet covered. Depending on the broker, the customer they choose may either be chosen randomly or picked on a first-in-first-out (FIFO) principle .

Holding

If a trader thinks a stock will go up in value, they can purchase options at a lower market price, then wait until the market price goes up to exercise the option. Then they purchase at their original lower price and can decide to sell at the new, higher market price. This is one of the benefits of trading stock options. However, traders can’t wait forever, because options contracts do have expiration dates.

Exercise-and-Hold

It is common for company employees to receive stock options, which give them the right to purchase company stock. They can purchase the stock and then hold onto it if they think it will rise in value. However, it’s important for employees to understand the rights they have with their options. Often, stock shares are vested for a certain amount of time, so an employee has to wait for that time to end before they are allowed to exercise the option.

Exercise-and-Sell-to-Cover

Sometimes there are fees, commissions, and taxes involved in exercising company stock options. To cover those fees, traders can exercise options, purchase shares of company stock and simultaneously sell some of those shares to cover the expenses.

Exercise-and-Sell

If a company employee wants to immediately sell their stock options after exercising their right to buy the stock, they can choose to exercise and sell. They will receive the cash amount of the current market value of the stock minus any fees and taxes.

Early Exercise

In addition to profiting off of a stock’s price increase, options traders may want to exercise early so that they can earn dividends off of the underlying security. Traders who write call options should be prepared to close out a trade at any time prior to the contract’s expiration date, especially if the contract is in-the-money. If a put option is in the money, most likely the owner will exercise it before it expires.

Advantages and Disadvantages of Exercising an Option

Exercising options presents opportunities to earn a profit, but there also are potential downsides to exercising options.

Exercising Options

Advantages	Disadvantages
Earn dividends from owning the underlying stock.	Fees, taxes, transaction costs potentially could cancel out any profit.
Sell the underlying stock for a profit.	Increases chance of risk: margin call, stock’s value could decrease.
In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them. One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.	The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value. If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components. But if you exercised them instead, you would only benefit from the intrinsic value. Why? Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

Advantages

Disadvantages

Earn dividends from owning the underlying stock.

Fees, taxes, transaction costs potentially could cancel out any profit.

Sell the underlying stock for a profit.

Increases chance of risk: margin call, stock’s value could decrease.

In general, traders can make a greater profit via closing positions — by buying or selling options rather than exercising them.

One of the few instances where it could be advantageous to exercise a contract is if you’d like to own the stock outright instead of basing a contract on it.

The one way that exercising a contract could actually make you lose out on money has to do with the complicated price structure of options, which consists of two components: extrinsic (time value) and intrinsic value.

If you own options contracts that are in the money, then the price of those contacts will comprise both extrinsic and intrinsic value. If you sell these options, you’d benefit from both the intrinsic and the extrinsic price components.

But if you exercised them instead, you would only benefit from the intrinsic value. Why?

Extrinsic value serves to compensate the writer (seller) of options contracts for the risk they are taking. Once you exercise an options contract, the contract itself effectively ceases to exist, so that all extrinsic value is lost.

How Do You Know Whether to Hold or Exercise an Option?

It can be difficult to know when and whether to exercise an option. There are different options trading strategies that can prove beneficial to exercising early, or to waiting or even selling the option contract itself. Many factors come into play when making the decision to exercise an option, such as

• the amount of time left in the contract,

• whether it is in-the-money and if so by how much, and

• whether the trader wants to buy, sell, or hold shares of the underlying security.

Time Value

One key thing to know about options trading is how options pricing works. Options lose value over time until they are finally worth nothing at their expiration date. If a trader owns an option that still has time left on it, they may consider selling the option or waiting to exercise it. Often it is more profitable to sell the option than to exercise it if it still has time value. If an option is in the money and close to expiring, it may be a good idea to exercise it. Options that are out-of-the-money don’t have any intrinsic value, they only have time value.

Transaction Costs

In addition to the premium a trader pays when buying an option, they must also pay transaction and commission fees to their broker. There can be fees both when exercising an option and when buying or selling the underlying shares.

Increased Chance of Risk

Buying a call option is fairly low risk because the most a trader can lose is the premium amount they paid when they bought into the contract. Exercising an option increases risk, because even if the trader profits in the short term by exercising and buying the stock at a good price, the stock could decrease in value any time. Because the trader already lost the premium amount, they would need to earn at least that amount back to break even on the trade.

Exposure to Margin Risk

To purchase the shares of the underlying security, a trader needs to use cash from their account or take out a margin loan from their broker. If they take out a loan, they increase their chances for risk and greater expenses.

Options Obligations

The owner of a long option contract has the right to buy shares of the underlying stock if they choose to exercise it. The selling trader on the other side of the contract is obligated to fulfill the contract if the owner decides to buy. If the buyer exercises their right, the seller must deliver the number of shares — generally 100 shares per contract — for the strike price set by the contract. If the buyer does exercise the contract, they are then obligated to pay the seller for those shares.

The brokerage firm gives notice to a random seller when a buyer exercises an option that fits the transaction parameters. This could happen at any time prior to the expiration date. A seller can close out their option contract early if it hasn’t been exercised yet. The process of assigning and exercising options is all automated. So if a trader sells an option, when it gets exercised the stock will automatically be removed from their account, and they receive cash in their account in return. The buyer will receive the shares in exchange for cash from their brokerage account.

The Takeaway

Stock options are a popular investing tool to gain exposure to securities with a smaller upfront cost and level of risk. If you’re interested in starting to build a portfolio, a great tool to use is SoFi Invest. The online trading platform lets you research, track, buy and sell stocks, ETFs, and other assets right from your phone — all with 24/7 convenience.

More ways to invest — all in one place. You can connect your banking and any other investment accounts to the SoFi Invest app to see all your financial information easily in one simple dashboard.

Get started trading on SoFi Invest today.

FAQ

How can you tell when to exercise an option?

It could be beneficial to exercise an option if the underlying security’s price is more than the strike price of a call option; or the underlying security’s price is less than the strike price of a put option.

How are early-exercise options different from exercise options?

Early-exercise options differ from exercise options in one way: Early exercise is possible with American-style option contracts only. You cannot do this with European-style option contracts, as they rule that you may exercise on the expiration date only.

What is a cashless exercise in options?

Also called the “same-day sale,” a cashless exercise is when an employee exercises their stock options via a short-term loan provided by a brokerage firm.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Options involve risks, including substantial risk of loss and the possibility an investor may lose the entire amount invested in a short period of time. Before an investor begins trading options they should familiarize themselves with the Characteristics and Risks of Standardized Options . Tax considerations with options transactions are unique, investors should consult with their tax advisor to understand the impact to their taxes.
*Borrow at 12%. Utilizing a margin loan is generally considered more appropriate for experienced investors as there are additional costs and risks associated. It is possible to lose more than your initial investment when using margin. Please see SoFi.com/wealth/assets/documents/brokerage-margin-disclosure-statement.pdf for detailed disclosure information.
SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

Photo credit: iStock/whyframestudio
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Jul

2022

Guide to Saving Money on Hotels for Your Next Vacation

By Dan Miller | Credit, Family Finances, money | Comments Off

Along with flights, lodging costs are one of the biggest expenses for many vacationers. As such, savvy travelers are likely on the lookout for how to save money on hotels when planning their vacation.

While hotel prices often rise and fall over time based on supply and demand, there are ways to save money on hotels on vacation. This ranges from being flexible about when and where you travel to getting a hotel credit card and taking advantage of cashback rewards. Read on for a full rundown of the best ways to save on hotels for your next vacation.

Recommended: Can You Buy Crypto With a Credit Card

Tips to Save on Hotels While Traveling

Wondering how to save on hotels when traveling? Here are some tips to try.

Getting a Hotel Credit Card

Using credit card rewards to travel for less is one way to save money on hotels while traveling. Most major hotel chains have a co-branded credit card that allows you to earn points for staying with them as well as on your everyday spending.

Additionally, many of these hotel credit cards offer sign-up bonuses. With these bonuses, you may be able to earn enough credit card points for a few free nights just by meeting a minimum spending amount.

There are different credit card rewards programs, so just make sure to choose the one for the hotel where you’re wanting to stay.

Earning Hotel Cashback

One of the downsides of getting a hotel credit card is that in most cases, you’re limited to using your points to stay with that particular hotel chain. If you have a Marriott credit card that earns Marriott Bonvoy hotel points, for instance, you can’t use them to stay at a Hilton or Hyatt.

One way to get around that is to use a credit card that offers cash back rewards. These cards allow you to redeem cash rewards from your everyday purchases that you can then use to pay for any hotel you want.

Recommended: What is the Average Credit Card Limit

Keeping an Eye Out for Deals

Flexibility is key to saving money on hotels, and the earlier you start planning your vacation, the more luck you’ll have in finding travel deals. Many successful vacationers start planning their trips up to a year before they actually plan to travel. That gives you plenty of time to explore your options, wait for deals to pop up, and keep an eye out for sales.

Checking All the Conditions While Booking the Hotel

When you’re booking a hotel room, you’re generally presented with several different room rates. You might have a different rate if you’re a member of the hotel loyalty program, if you prepay for your stay, or if you belong to a specific organization.

These different rates also usually come with different cancellation policies. Make sure to read the fine print before you book, so you can know what to expect during your stay. The fine print could also detail additional fees that the rate doesn’t clearly include.

Looking Out for Free Breakfast

One way to plan a budget family vacation is to look for hotels that include complimentary breakfast with the room rate. If you’re traveling with a family, getting the breakfast that’s included in your hotel reservation might save you anywhere from $20-$50 per day. This can free up some of your hotel funds for other vacation activities, and can make a difference when comparing rates from different hotels.

Joining a Hotel Points Program

Even if you don’t sign up for a hotel chain’s co-branded credit card, you’ll want to make sure to join their loyalty program. There’s typically no cost to join the hotel’s loyalty program, and you’ll generally get perks like lower nightly rates or complimentary Wi-Fi. This can be a great way to save money for a trip.

Taking Advantage of Falling Rates

One strategy for saving money on hotels is to only book a refundable rate that you can cancel at any time. Then, periodically check back to see if the rate has fallen. If the rate is lower than when you first booked the hotel, cancel your original reservation and book at the new lower rate.

There are also services that you can take advantage of if you don’t want to stay on top of price tracking yourself. For example, websites and apps like Hopper and Rebookey can monitor hotel prices and notify you if the price drops after you’ve booked.

Recommended: How to Avoid Interest On a Credit Card

Making Payments in Advance

Alternatively, you can prepare financially for travel by making your hotel payments in advance. Many hotels offer a lower rate when you prepay as compared to a refundable hotel rate where your credit card isn’t charged until your stay. You could save anywhere from $10 to $20 per night by prepaying in advance.

Plus, if you pay with a credit card that offers credit card travel insurance, you’ll have peace of mind that your prepaid funds aren’t lost if your travel plans change unexpectedly.

Recommended: When Are Credit Card Payments Due

Sticking to Your Budget

Like most financial purchases, one of the best ways to save money is to establish a written budget and then stick to it. If you plan for a trip a year in advance, you can make a budget for your trip and then create a travel fund where you put 1/12 of the cost into your travel fund each month.

Being Spontaneous

While hotel prices go up and down — sometimes multiple times per day — based on supply and demand, you can sometimes get great deals by booking at the very last minute. If you have a ton of flexibility, you can sometimes find cheap cruises or outstanding last-minute weekend hotel deals. This strategy is best used if you don’t have concrete plans and don’t have a strong preference for where you go.

Using Discounts You Already Have

If you’re a frugal traveler, you’ll want to also take advantage of any discounts that you already have. This could include saving on gas using grocery fuel points, buying discounted gift cards, or using credit card points to offset some of your travel costs.

This is another reason why planning in advance and being flexible can help — the more time you have to plan, the more time for you to take advantage of some of these deals.

Apply for a New Rewards Credit Card With SoFi

Lodging costs can be one of the most expensive parts of any vacation, so it’s a good idea to know how to save money on hotel rooms. Hotel prices fluctuate often based on supply and demand, so plan as far in advance as your schedule allows. The more flexible you can be in terms of when you travel, where you go, and what hotel you want to stay at, the more likely it is that you’ll be able to save money on hotels.

FAQ

What days are the cheapest to stay in hotels?

Determining which days are the cheapest to stay in hotels depends quite a bit on where the hotel is and who their clientele typically is. If you’re looking to stay in a tourist-heavy vacation spot, it’s likely that weekends are most expensive. On the other hand, a hotel that caters to business travelers might be more expensive during the week and cheaper on weekends.

What time of the year do hotel prices drop?

There isn’t a set time of day or year when hotel prices drop. Instead, hotel prices vary according to supply and demand. One strategy to save money on hotels is to book a refundable rate initially. Then, you can monitor prices and if the price goes down, you can just rebook.

Are hotels cheaper last minute?

Hotel prices vary all the time, both up and down. It’s possible for hotel prices to go down if you wait until late in the day on the night you want to stay. This can be an option if you have flexibility in your plans.

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹See Rewards Details at SoFi.com/card/rewards.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Jul

2022

Investing With Credit Card Rewards: Tips for Maximizing Cash Back Earnings

By Dan Miller | Credit, Financial Independence, money | Comments Off

Responsible credit card usage can add hundreds if not thousands of extra dollars to your bottom line each year. Many credit cards offer rewards that you can earn with each and every purchase. You can choose a credit card that helps you earn airline miles, travel rewards, or cash back.

Before applying for or using a credit card, you’ll want to make sure that you have the financial ability and discipline to pay off your credit card statement in full, each and every month. If you don’t, the interest and/or fees will likely exceed any rewards you might earn. But if you do, you might consider investing with credit card rewards to further grow your funds.

What Are Credit Card Rewards?

Just like knowing what a credit card is, it’s important to understand what credit card rewards are. Many credit card companies offer credit card rewards as an incentive for you to apply for and regularly use their credit card.

These rewards can be airline miles, other types of travel rewards, bank-specific points, or straight cash back. The credit card you choose determines the kind of credit card rewards that you’ll earn.

Types of Credit Card Rewards

If you have a rewards credit card, there are several different kinds of credit card rewards that you can earn.

Cash Back Rewards

If you have a cash back credit card, you’ll earn cash back with every purchase. Some cash back credit cards earn different rates of cash at different types of merchants, while others earn a flat cashback rate no matter where you use the card.

Travel Rewards

Another popular type of credit card rewards are a variety of different kinds of travel rewards. You might get an airline credit card that earns airline miles for a specific airline or hotel points good for stays at a particular chain of hotels. Other travel rewards credit cards offer rewards points that you can use at a flat rate on any type of travel purchase.

Bank Points

Some banks offer credit cards where you earn points that are proprietary to that bank or credit card company. Many times, these points can be used like cash on purchases, or for travel-related purchases.

Guide to Investing Your Credit Card Cash Back Rewards

If you have a credit card that earns cash back rewards, you can often redeem them in many different ways.

Direct Deposit

One way to get your credit card cash back rewards is through direct deposit to a checking or savings account that you own. You might set up your cash back rewards to automatically transfer to your account once they reach a certain threshold, like $25. You might also be able to set up your account to regularly transfer your cash back rewards every month or every quarter.

Paper Checks

If you prefer something that you can tangibly hold, you can also request that your credit card cash back rewards are mailed to you via a paper check. Some credit card companies may charge a fee for mailing paper checks, so make sure you won’t be charged a fee before choosing this option.

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Statement Credits

Another way you might access your cash back rewards is through a statement credit. With a statement credit, your cash back rewards are applied directly to your credit card balance. This will lower the amount that you need to pay in order to completely pay off your balance off in full.

How Do Credit Card Rewards You Can Use for Investing Work?

Before using one, it’s important to understand how credit cards work, and how credit card rewards that you can use toward investing work. An investment credit card is similar to a cash back credit card in that you earn rewards that work like cash. But instead of redeeming your rewards for a statement credit or via direct deposit, you invest your cash back rewards in an investment account.

Tips for Maximizing Your Credit Card Cash Back Reward Earnings

Enjoying credit card bonuses is one way that you can maximize your credit card cash back earnings.
Many credit cards offer an initial welcome offer where you get a bonus amount if you meet certain spending or other criteria in the first few months of having the card. That can really supercharge your credit card cash back reward earnings.

If your cash back credit card earns a higher rate in certain categories or at certain merchants, make sure to use it where it gets the highest value.

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Pros and Cons of Investing Your Credit Card Cash Back Rewards

Here is a look at some of the pros and cons of investing your credit card cash back rewards:

Pros of Investing Your Credit Card Cash Back Rewards	Cons of Investing Your Credit Card Cash Back Rewards
Cashback and other rewards are not taxable.	If you’re not paying off your balance in full each month, interest and fees can offset any rewards earned.
Investing your rewards can help supplement other investing efforts.	It’s hard for small amounts to make a meaningful impact on overall investing goals.
Investing your credit card rewards doesn’t require dipping into your budget.	If your brokerage doesn’t support fractional shares, your investment options might be limited.

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Other Investment Options

One of the best things about the cash that you earn from cash back rewards is that it’s actually cash. Cash can be used for just about anything in your budget, and so can cash back rewards.

For example, you can use your cash back rewards in an online trading platform to invest in stocks or index funds. You can also use them to invest in real estate or other types of investments, or even use them to invest in yourself through education or job training classes.

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The Takeaway

If used wisely, credit cards and credit card rewards can serve as a valuable addition to any financial plan. Cash back credit cards allow you to earn money back on every purchase, as well as possibly a larger initial bonus. It’s a good idea to have a plan for how you want to use your cash back rewards, and always make sure to pay off your credit card statement in full, each and every month.

One way to use credit card rewards to fund your investments is to get a cash-back credit card like the SoFi Credit Card.

FAQ

Should you invest your cash back rewards?

One of the best things about cash back rewards is that they function pretty much the same as cash in any other format. So whether you directly invest your cash back rewards or use them as a statement credit and invest money from your checking account, it works out pretty much the same. The important thing to do with your credit card rewards is to not spend them mindlessly. Be intentional and make a conscious decision on the best way to spend them for your specific financial situation.

Can I buy stocks with my credit card?

Most brokerages will not allow you to directly buy stocks with a credit card. Instead, one way to invest your credit card rewards is by using a cash back credit card like the SoFi credit card. You can earn cash back with each purchase and then directly invest those funds with your SoFi Invest account.

What is the smartest way to use a credit card that has rewards?

The first thing that you’ll want to do when using a credit card is make sure that you have the financial discipline and ability to pay off your credit card in full each month. This ensures that you won’t be charged any interest or fees. Then, decide how your credit card rewards will make the biggest impact in your financial life.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

¹See Rewards Details at SoFi.com/card/rewards.

New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet

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Jul

2022

Credit Card Miles vs. Cash Back: Guide to Choosing Between Cash Back and Travel Rewards

By Austin Kilham | Credit, Family Finances, money | Comments Off

Credit cards often offer rewards to incentivize you to apply for a credit card and use it. Cash back cards and miles cards are two common types of rewards cards. The former gives you cash rewards, while the latter offers miles or points that you can use toward a purchase.

Both types of rewards can end up being quite valuable for cardholders. But how do you decide whether you want to earn miles vs. cash back? Here’s a look at cash back vs. travel rewards cards to help you decide which is right for you.

What Are Points and Miles Credit Cards?

Points and miles credit cards are technically two types of rewards cards, a broader category within what a credit card is. Points cards give you points that you can redeem for things like travel, merchandise, or cash back to reward you for your spending. Generally, a point is worth about $0.01, though that varies by card and, in some cases, what you choose to use your points for. For example, you might earn more points for travel than you do when you redeem your points for gift cards.

Miles cards usually offer airline miles associated with an airline’s frequent flyer program. You can earn them by using a credit card that’s co-branded with a specific airline, or a card that’s a more general travel card. With co-branded cards, you can redeem miles with that airline or their partner airlines. Cards that aren’t co-branded may allow you to use your miles with various airlines.

As with points, airline miles are typically worth about $0.01, though the value of each mile might differ depending on when you book your travel and what type of seat you purchase.

Pros and Cons of Points and Miles Credit Cards

Before signing up for a miles or points card, it’s important to consider the advantages and disadvantages.

On the one hand, points and miles cards both offer travel-related perks, though miles cards may only offer travel through specific airlines. Cards may also come with bonuses to help incentivize you to apply for a credit card.

However, miles and points cards may charge a hefty annual fee that helps the credit card company offset the cost of providing the rewards program. With co-branded cards, you typically cannot transfer miles to other airlines. Additionally, the value of your miles may vary according to a variety of factors, such as the date you choose to travel or the seat you want to sit in.

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Pros of Points and Miles Credit Cards	Cons of Points and Miles Credit Cards
Reduce the cost of travel.	Can’t transfer miles to another airline loyalty program.
Provide travel-related perks.	Value of points and miles may vary.
May come with a sign-up bonus.	Points and miles cards may charge large annual fees.

What Are Cash Back Credit Cards?

Cash back credit cards offer you cash as a reward for making purchases with the card. For example, your card might offer you up to 3% cash back on all purchases, which means that for every $100 you spend, you’ll receive $2. Cash back cards usually let you redeem your rewards for cash via statement credit, bank transfer, or check.

Cash back cards can be flat-rate cards, meaning you’ll earn a fixed percentage on every purchase. Or, they worked based on a tiered system. For example, some cards will offer you higher rewards for certain purchases, like travel, groceries, or gas. In some cases, cards may have rotating rewards categories that change every few months.

Related: Enjoying Credit Card Bonuses

Pros and Cons of Cash Back Credit Cards

When you consider a cash back card, again consider potential disadvantages in addition to benefits.
On the plus side, cash back cards typically don’t come with steep annual fees. You can redeem your rewards for cash that you can use for any purpose, and the amount you earn is fixed — the value or your reward doesn’t vary by date or other factors as it might with a miles card.

On the other hand, the amount of cash you can earn may be limited, and these cards may not offer many other perks. Cash back cards also typically don’t come with credit card sign-up bonuses that are as big as those offered by miles and points cards, marking another difference between cash back vs. miles cards.

Pros of Cash Back Credit Cards	Cons of Cash Back Credit Cards
Usually have no annual fees.	May offer lower sign-up bonuses.
Rewards can be redeemed for cash.	Cash back cards may offer fewer perks.
The value of your reward is fixed.	The amount you can earn may be limited.

Similarities Between Cash Back and Points and Miles Credit Cards

Both cash back and points or miles cards offer you rewards based on your spending, and they may offer higher rewards for spending in certain categories. Be aware that some rewards have expiration dates, as well.

Rewards cards often carry higher-than-average interest rates. As a result, you’ll want to make sure that you will be able to pay off your credit card bill on-time and in full when you use your card, given how credit cards work when it comes to interest.

Recommended: What is the Average Credit Card Limit

Differences Between Cash Back and Points and Miles Credit Cards

The main difference between a cash back credit card vs. miles and points card is how you redeem your rewards. With cash back cards, you received a percentage of your spending, sometimes limited to a maximum amount. You earn points and miles in a similar way. However, their value may change and you may be limited in where you can redeem them.

If you have a co-branded miles card for example, you may only be able to use your miles with that airline. Cards that aren’t co-branded may offer you the chance to redeem points and miles with a variety of companies, such as airlines and hotel brands.

Similarities Between Cash Back and Points and Miles Credit Cards	Differences Between Cash Back and Points and Miles Credit Cards
Offer rewards based on spending.	Cash back card rewards are redeemed for cash.
May offer greater rewards for spending in certain categories.	Points and miles allow you to redeem rewards toward purchases.
Typically has a higher interest rate.	Points and miles cards may limit where you can redeem your rewards.

Recommended: How to Avoid Interest On a Credit Card

Is It Better to Get Cash Back or Miles?

Whether or not you choose a cash back card vs. a miles or points card will depend on how much you travel. Travel cards tend to offer better value when you redeem points and miles for travel-related rewards. So if you’re a big traveler, one of these cards may be right for you. However, if you’re more of a homebody, a cash back rewards program may be a better fit.

Other Credit Card Rewards

Cash back or travel rewards isn’t your only choice. There are a variety of other credit card rewards programs you may encounter.

Gas Rewards

Gas cards are typically co-branded with certain gas vendors. Users usually earn points and discounts only on gas purchases. In general, gas cards have relatively high rates of return and don’t charge an annual fee.

Retail Credit Cards

Credit cards that are co-branded with major retail outlets will often offer discounts at that outlet. Rewards might be applied at the point of sale or as regular statement credits.

The Takeaway

Understanding how credit cards allow you to redeem rewards — and how useful those rewards are — is key to deciding which card is right for you. If you’re a world traveler, a miles card might fit the bill. And if you don’t fly frequently, you may be better served by earning cash back on purchases you make in your day-to-day life.

Shop around for the credit card that best suits your needs. A credit card from SoFi offers 2% unlimited cash back rewards and charges no foreign transaction fee. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1

FAQ

What is the difference between cash back and miles?

Cash back cards allow you to earn back a percentage of the purchases you make. Miles cards allow you to earn miles based on the purchases you make, which you often must use toward airline travel.

Is cash back really worth it?

Cash back rewards can allow you to earn some money back from your everyday spending. However, you’ll want to make sure you can pay off your balance in full each month, as rewards cards that offer cash back tend to have higher interest rates than non-rewards credit cards.

Can you convert miles to cash?

Some cards allow you to convert miles to cash, but users will get the most value from redeeming miles for travel. You can find out whether your card allows you to convert miles to cash by calling your credit card issuer. Find their number on the back of your credit card.

Do cash back or credit card miles have higher interest rates?

Both cash back and travel rewards credit cards tend to have higher interest rates as they’re types of rewards credit cards. In general, rewards credit cards usually have higher interest rates than no-frills cards that don’t offer rewards.

Photo credit: iStock/franckreporter

Jul

2022

18 Surprising Findings About Cash-Back Credit Card Users

By Brandon Ruse | Credit | Comments Off

How much cash back are people actually getting from their credit cards? Who charges the most money to their card, boomers or Gen Z? Does having a credit card mean you’re more likely to have good credit compared to someone who doesn’t?

These questions, and many more, are what we set out to answer in our study on cash-back credit card users*.

We surveyed a total of 1,205 people—802 who use cash-back credit cards to pay for most expenses and 403 who primarily use a debit card, cash, or money app (such as Venmo). By analyzing and comparing the two groups, we were able to learn more about how preferred payment methods can affect spending and budgeting habits.

Read on for the 18 most interesting findings from our research.

Notes: Percentages are rounded to the nearest whole number, so some data sets may not add up to 100%.

*We focused on cash-back rewards because they are the most popular type of credit card perk.

1. $50 was the median amount people made in cash-back rewards in a month.

Monthly Cash-Out for Credit Card Rewards

Our study found that $50 was the median amount people earned in cash-back rewards in a month.

But certain age groups may be more savvy about racking up their rewards than others.

The median cash-back amount by generation was:

• Boomers: $20

• Gen X: $40

• Millennials: $50

• Gen Z: $59.50

Because boomers are likely to have higher earnings and more savings than the other age groups, they may be less concerned about maxing out their cash-back rewards. And Gen Z respondents, who may have smaller salaries and bank accounts, might have learned to be savvy with their cash-back rewards card out of financial necessity.

2. Three-quarters of cash-back credit card users save up their rewards over time.

Save up rewards or cash out

75% of all cash-back credit card users prefer to save their rewards versus cashing them out every month.

Respondents may have long-term goals in mind for their cash-back credit card. By accruing the cash they can use it for a larger purchase.

3. A majority of cash-back credit card users have “Very Good” or “Excellent” credit.

How People's Credit Scores Differ Based on Payment Method

Our study found that a majority (58%) of cash-back credit card users have “very good” or “excellent” credit (meaning a score of 740 or above).

In fact, people who use a cash-back credit card are more than twice as likely to have “excellent” credit (a score of 800-850) compared to those who used a debit card, cash, or money-transfer app to make most of their purchases (23% vs. 9%).

Debit, cash, and money app users were five times more likely to have “poor” credit (a score of 579 or below) than cash-back rewards cardholders (15% vs. 3%).

Breaking down the data by age we discovered:

• 71% of boomers who use cash-back credit cards have “very good” or “excellent” credit.

• 55% of Gen Xers who use cash-back credit cards have “very good” or “excellent” credit.

• 53% of millennials who use cash-back credit cards have “very good” or “excellent” credit.

• 48% of Gen Zers who use cash-back credit cards have “very good” or “excellent” credit.

Older credit card users may have better credit because they’ve had more time to build their credit history.

4. The amount of money spent by cash-back credit card users in a month was 67% greater than the amount spent by debit, cash, and money app users.

The difference is significant: Our study found that the money cash-back credit card users spent in a month was 67% more than the amount of money that debit, cash, and money app users spent.

The median spending amount for:

• Cash-back credit card users was $1,000.

• Debit card, cash, and money app users was $600.

Cash-back credit cardholders may feel incentivized to spend money since they know they’ll earn rewards on their purchases. Credit cards also allow for greater financial flexibility compared to debit cards.

Consider this: If the group who primarily uses a debit card, cash, or money app were to use a 2% cash-back credit card, they could potentially earn an extra $144 in a year (2% x $600/month x12 months = $144). If they were to use a 3% cash-back credit card, they would potentially pocket over $200 in a year, just in rewards (3% x $600/month x 12 months = $216).

5. Gen Zers are the most conservative credit card spenders compared to other age groups.

How much did people spend in a month?

Surprisingly, Gen Zers are the most frugal credit card spenders compared to all other age groups.

The median spending amount for Gen Z cash-back credit card holders was half that of Gen Xers and millennials.

Cash-back cards spending by generation:

• Boomers: $700

• Gen X: $1,000

• Millennials: $1,000

• Gen Z: $500

Gen Xers and millennials spent the most ($1,000), which could be because these groups are more likely to have growing families and more expenses. Gen Zers spent $500; contributing factors could be lower credit limits, financial support from their parents, and fewer financial obligations.

6. More than half of respondents use their card to pay for mortgage, rent, and/or utilities.

What age groups are most likely to pay for housing expenses with a credit card?

More than half of people who regularly use a cash-back credit card (57%) used it to pay for their mortgage, rent, and/or utilities in March 2022. With living expenses on the rise, and the potential to earn considerable points, it makes sense that people would put these bills on their cash-back card.

There are some gender and age differences. We discovered that 65% of men used their cash-back card to pay for mortgage, rent, and/or utilities, compared to 47% of women. Millennials and Gen Zers were the age groups most likely to put these expenses on their credit card, and Boomers were the least likely.

Percentage of cash-back credit card users who paid for mortgage, rent, and/or utilities with their card:

• Boomers: 41%

• Gen X: 49%

• Millennials: 64%

• Gen Z: 62%

7. More than one in 10 respondents spent over $500 on gas in March alone.

According to our study, 12% of cash-back credit card users spent over $500 on gas in the month of March. That means the amount of money these respondents spent on gas was more than the average monthly car payment for a used vehicle ($488).

Method of payment didn’t affect how much respondents spent on gas overall. We found that 10% of debit card, cash, and money app users spent over $500 on gas. The big difference: These consumers were not able to earn cash back on their petrol purchases the way cash-back credit card users were.

8. Debit card, cash, and money app users may have a harder time saving compared to credit card users.

How Do Monthly Savings Differ Depending on Preferred Payment Method?

Over the course of a month, we found that:

• 33% of debit card, cash, and money app users were not able to put any money into savings.

• 15% of cash-back credit card users were not able to put anything into savings.

This means debit card, cash, and money app users are more than twice as likely to be unable to contribute to their savings compared to cash-back credit card users.

Looking at respondents who put at least $100 into savings in a month, we discovered that 72% of cash-back credit card users were able to do so, compared to 52% of debit card, cash, and money app users.

9. Millennials may be the best savers of all the age groups.

Based on the results of our survey, millennials were the star savers. The median amount they put into savings monthly was $300.

Gen X and Gen Z save $250 and $287 monthly, respectively.

Boomers had the lowest median monthly savings amount at $100. One possible reason: Since they likely have some savings built up, they may not need to contribute as much to their nest egg as the younger generations.

10. People in relationships were able to save three times as much as single people.

Relationship savings

Being in a relationship may lead to fiscal stability. According to our survey, respondents who were married or living with a partner were able to save three times as much as those who were single, widowed, or divorced.

The monthly median savings amount for people who are:

• Married or living with a partner was $300.

• Single, widowed, or divorced was $100.

Those who are married or living with a partner had a median monthly spending amount of $1,000—meaning they save $0.30 for every $1 they spend. Those who are single, widowed, or divorced had a monthly median spending amount of $800, so they save about $0.13 for every $1 they spend.

11. Men are twice as likely to spoil their pets compared to women.

Men spoil their pets more than women

Dogs really are man’s best friend: Men are more than twice as likely as women to spend a significant sum on their pets.

Overall, 9% of all cash-back credit card users spent over $500 on their pet in a month.

Breaking down the numbers, we found that:

• 12% of men spent over $500 on their pets in a month.

• 6% of women spent over $500 on their pets in a month.

Money can’t buy love, but it can buy toys and treats.

12. More than one in 10 people spent over $500 on restaurants in a month.

Our survey found that 14% of cash-back credit card users spent over $500 on restaurants and bars. More specifically, 17% of men spent over $500 in a month versus 10% of women.

Millennials are 9x more likely to spend on restaurants than boomers

Millennials are most likely to spend a lot of money on restaurants and bars. This age group had nine times the percentage of respondents who spent over $500 compared to boomers.

Respondents who spent over $500 on restaurants in a month by generation:

• Boomers – 2%

• Gen X – 12%

• Millennials – 18%

• Gen Z – 13%

Debit card, cash, and money app users were not far behind—12% of these consumers spent over $500 on restaurants in a month. If they used a rotating rewards card that offered 5% back on dining instead, they would potentially earn $25 in rewards in a month, or $300 a year!

13. Gen Z spent the most on clothes and shoes.

Which age group is the most likely to spend the most on clothing?

According to our survey, 20% of Gen Zers spent over $500 in a month on outfits and shoes.

To put it into perspective, here’s the percentage of cash-back credit card users in different age groups who spent over $500 on clothing and shoes in a month:

• Boomers: 4%

• Gen X: 10%

• Millennials:18%

• Gen Z: 20%

Boomers are the most frugal when it comes to new clothes. More than one-third spent $0 on clothing and shoes in a month.

Percentage of cash-back credit card users who spent nothing on clothing and shoes in a month:

• Boomers: 35%

• Gen X: 22%

• Millennials: 16%

• Gen Z: 11%

14. Gas was the most regretted purchase for all respondents, regardless of payment method.

Purchases that brought people the most joy and regret

When asked what purchase respondents regretted most, gas rose to the top, regardless of payment method.

Here are a few other notable answers we received for most regrettable purchase:

• A puppy my son said he would take care of and didn’t

• A plane ticket and then forgetting what day the flight was

• A ticket to a bad movie

• I got scammed trying to buy an NFT

• Crypto futures

• A book shelf that fell apart two days after I put it together

• A $1,000 pair of shoes

• The wrong kind of ice cream

• A gym membership I didn’t use

15. Groceries and food purchases bring people the most joy.

When we asked cash-back credit card users what purchase brought them the most joy, we expected answers like vacations or special clothing. Instead, food and groceries were the most common responses.

We also discovered that people were happiest with purchases that involved a family member or pet, as illustrated by these responses:

• Birthday present for my mom

• Dinner with the wife for date night

• My dog getting her tooth/mouth fixed as she wasn’t in pain any longer

• A new bike for my daughter

• Dog’s birthday gifts

• My wedding dress

• Gifts for my grandchildren

• Catnip and wet food

• Lunch for my dad on his birthday

• A video game that me and my daughter play

• Taking care of my dog at the emergency vet because her life was saved

• Anniversary vacation with my wife

• My heart surgery

16. Men are more than twice as likely to spend over $500 on entertainment compared to women.

In one month, 15% of men who use cash-back credit cards spent over $500 on entertainment* compared to just 6% of women.

Of those men:

• 21% used a rotating-reward cash-back credit card.

• 11% used a flat-rate cash-back credit card.

That means men who have a rotating rewards cash-back card are almost twice as likely to spend over $500 on entertainment compared to men who use a flat-rate cash-back credit card.

*”Entertainment” was defined as “sports, concerts, etc.”

17. Millennials were the biggest travelers, but Gen Z isn’t far behind.

Which age group spent the most on travel?

Traveling can be an amazing experience, and being able to do so now is a sign that life is returning to normal. So who is going places? Looking at travel expenditures by age group, we found millennials to be the biggest travelers, with Gen Z right behind them.

Percentage of cash-back card users who spent over $500 on travel in a month:

• Boomers: 5%

• Gen X: 15%

• Millennials: 21%

• Gen Z: 18%

These numbers may speak to a greater travel trend, which predicts that Gen Z will overtake millennials in travel spending this year. According to Travel Pulse, 72% of Gen Zers are planning to splurge on a vacation in 2022, while 68% or millennials plan to do the same.

18. Men are more likely to spend a lot of money on home decor compared to women.

In our study, we found that 16% of all men who have cash-back credit cards spent over $500 on home-related expenses (furniture, decor, repairs), compared to 10% of women.

Of these men, 13% were single, divorced, or widowed, and 16% were married. Looking at the women who spent over $500 using their cash-back rewards card, 10% were married and lived with their partner, and 9% were single, divorced, or widowed.

The Takeaway

Our survey found that payment method, gender, and age can all affect a person’s spending and savings. For instance, men tend to spend more on their pets and home furnishings than women. Gen Zers accrue the most credit card rewards; boomers the least. And the majority of cash-back credit card users have “very good” or “excellent” credit scores.

In addition, cash-back credit card users are more likely to be able to put money into savings compared to people who use a debit card, cash, or money app to pay for most of their purchases. Perhaps the money they get in rewards goes into their nest egg.

¹See Rewards Details at SoFi.com/card/rewards.

New and existing Checking and Savings members who have not previously enrolled in direct deposit with SoFi are eligible to earn a cash bonus when they set up direct deposits of at least $1,000 over a consecutive 25-day period. Cash bonus will be based on the total amount of direct deposit. The Program will be available through 12/31/23. Full terms at sofi.com/banking. SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC.

SoFi members with direct deposit can earn up to 4.00% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 3/17/2023. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

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