How To Choose A Cash-Back Credit Card

No matter how many new credit card reward programs there are, cash-back cards remain popular. Strong demand is not surprising. Cash-back rewards are easy to understand, simple to redeem and straightforward in their value.

Underneath the simplicity, however, lurks a nagging question. Are you getting the most value possible from your cash-back credit card?

There are three types of cash-back credit cards: flat-rate, tiered and those with rotating categories. This guide covers some pitfalls to look for when choosing and using a cash-back card, and how to decide which cash-back card you should carry, including whether you should use more than one. First, however, let’s look at what a cash-back credit card is. The answer may surprise you.

What Is a Cash-Back Credit Card?

Cash-back credit cards allow you to earn cash-back rewards for making purchases on your card. Credit card rewards come in one of three forms: cash back, points or miles. Depending on the cash-back credit card you use, you may earn a flat cash-back rate on all your purchases or higher cash-back rates on purchases in certain categories.

The cash-back rewards you earn with some credit cards do not come in the form of cash. However, both points and miles credit cards generally permit cardholders to convert their rewards to cash. For example, the Chase Sapphire Reserve® card uses a points reward system. Chase Ultimate Rewards® points, however, can be redeemed for cash, used to book travel, buy merchandise or transferred to travel partners.

Credit card rewards programs value their points or miles you earn differently. Furthermore, the value of points and miles can vary based on how they are redeemed but most points and miles rewards redeemed for cash are worth about 1 cent each.

After you build up enough credit card rewards, you can redeem them. Most cash-back credit cards allow you to redeem rewards in at least one of three ways: a statement credit, direct deposit to a bank account or a check.

Types of Cash-Back Credit Cards

Typically, cash-back credit cards fall into three major categories. Here’s how to tell which category a card is in and what you may want to consider within each category.

Flat-Rate Cash-Back Credit Cards

Flat-rate cash-back credit cards are the easiest cards to identify and use. These credit cards offer a single cash-back rate on all purchases across the board. Some time ago, a 1% cash-back reward rate was the standard. Over the past several years, however, many credit cards have moved to a 1.5% and even 2% standard cash-back rate.

Tiered-Rate Cash-Back Credit Cards

Tiered-rate cash-back credit cards allow you to earn more cash back on specific types of purchases. These cards offer higher cash-back rates in certain categories while also offering a flat cash-back rate on other purchases.

Common higher-earning categories on tiered-rate cash-back cards include dining, groceries, gas station or travel purchases. Each tiered-rate card will offer its own set of higher-rate categories. For this reason, it pays to search for the card that best fits your spending habits.

Depending on the card, higher-earning tiers may limit the dollar amount of purchases you can earn the higher cash back rate on. For example, the Bank of America® Customized Cash Rewards credit card limits its earning rates. Cardholders will earn 3% cash back in the eligible category of your choice, 2% at grocery stores and wholesale clubs (up to $2,500 in combined choice category/grocery store/wholesale club quarterly purchases) and unlimited 1% on all other purchases.

Rotating Category Cash-Back Credit Cards

Rotating category cash-back credit cards lure you in with a high cash-back rate in bonus categories. Unfortunately, they can be frustrating to use. These cards typically come with 5% cash-back categories that change once per quarter.

The rotating categories may differ from year to year. This makes them less predictable than tiered-rate or flat-rate cash-back credit cards.

To make matters more complicated, these cards often require you to “activate” the 5% bonus cash-back each quarter by logging into your account and choosing to opt-in. If you don’t, you normally earn the much lower cash-back rate offered on all other purchases. However, issuers may send out reminders when it comes time to activate a new bonus category.

How Many Cash-Back Credit Cards Should I Have?

Having multiple cash-back credit cards can help you earn even more rewards. The decision to have multiple cards ultimately comes down to your comfort with your ability to manage the cards and the amount of time you want to spend.

If you’re just getting started with cash-back credit cards, it may be best to pick a single card for your spending habits. Then, focus on getting comfortable with that card and its rewards program.

Once you get a feel for how the program works, you can decide whether you want to get another credit card to further maximize your earnings. Having multiple cash-back credit cards has benefits. You can mix and match different credit cards to get the most cash back possible on each purchase.

Don’t Try to Earn Cash Back If You’re Paying Interest and Fees

Credit cards can offer a decent cash-back rate on your purchases. The cash back you earn may not always be worth it, though. Some cards offer as much as 6% cash back on certain purchases—but many purchases will earn around 2% or 3% cash back.

When you compare this to the interest rates typically charged on the balance you carry, the rewards are tiny. If you do have to carry a balance on a credit card, you can likely do better financially by choosing a low APR credit card or a credit card that offers an introductory 0% APR period, rather than one that earns cash back. If you already are paying interest on a credit card, you can consider a card with a good balance transfer offer.

Bottom Line

Cash-back credit card rewards can provide you with a nice boost to your monthly budget. While you won’t get rich from credit card cash back, every dollar helps, especially when you’re earning rewards on money that you would spend anyway. Look at your spending and consider your personal time and preferences to determine whether a flat-rate, tiered-rate or rotating category cash-back credit card is the best fit for you. Once you master a single card, you can add other types to your wallet to earn even more cash back on your spending.

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