Last updated on July 17th, 2020
Cash back credit cards are among the most popular rewards cards as they offer cash back on purchases you make in a variety of categories. Through the use of four-digit merchant category codes assigned to businesses, card issuers can track and categorize the purchases you make to grant you the proper bonuses. Cash back rates do vary from card to card, and even from quarter to quarter using the same card, so finding the one that best matches your spending habits is key.
Cash Back Credit Cards at a Glance
While there are different types of cash rewards credit cards, they all grant you a bonus after you spend on a purchase. The rewards rate for a cash back credit card can start as low as 1% and generally go up to around 5% or so depending on the card issuer, who may also grant you other perks and introductory bonus offers. If you spend 500 on purchases within three months of opening select cash back credit cards, for example, you may earn a 150 bonus statement credit. Often times, the combination of the tax-free cash back that you’ll earn with the card along with its other benefits will earn you more than patiently waiting for the lower APR yield on your savings account to accumulate, too.
Different credit scores qualify you for different levels of cash back credit cards, but generally, you want to have “good” credit or better if you want the best rewards. Having a better credit score also gives you a better chance to qualify for a credit card with a lower standard APR, which is important to note if you tend to carry a balance from month-to-month.
Don’t let the potentially high rewards rate that cash back credit cards offer distract you from the fees that you may be charged for using and simply owning the card. Annual fees of up to $100 aren’t unheard of when it comes to cash back credit cards, but don’t let that charge scare you away. In fact, cash back credit cards with high annual fees tend to offer better rewards bonuses. So long as the rewards you earn annually outweigh the annual fee, you’re ahead of the game.
Some cash back credit cards may charge you a late payment fee if you don’t pay back the balance owed between statements, and others tack on foreign transaction fees for international purchases. Read the card’s terms and conditions and other advertiser disclosures before making your decision to avoid being surprised by these or any other charges.
What to Look for in a Cash Back Credit Card
Cash back credit cards are regularly compared to one another based on their rewards structure, categories, and other factors. Take the features below into account when shopping around for a new card.
Perks that Make Sense: Just as you wouldn’t wear clothing in a size that’s not your own, you want to find the cash back rewards categories that fit you best. If you have an extended commute around the city that includes going to work, running errands, and picking the kids up from practice, a card that grants cash back on gas will likely earn you lots of cash back. The same concept can be applied to your favorite coffee shop or department store, as there are likely credit cards that offer cash back rewards in those categories if the retailers don’t offer their own credit card outright. While a card that offers 5% back on entertainment tickets may seem like a good deal, if you tend to spend time at home with your loved ones instead of going out to live shows, then you wouldn’t be able to maximize the benefits of that category.
Convenient Rewards Redemption: There are a handful of flexible ways to redeem the rewards earned on a cash back credit card. Statement credits are a popular option, as are gift cards to big chain retailers and supermarkets, or a direct deposit into your bank account. Some cards give you the option of having a physical check mailed back to you if you want a paper trail of your rewards payouts, whereas others may give you the option to pay the funds forward to the charity of your choice.
Manageable Standard APR: The introductory APR offered by some cash rewards credit cards are often a big selling point to new applicants. Once that period is over, though, the card’s regular annual percentage rate may be too outrageous to handle if you regularly carry over balances between billing cycles. You can offset this by paying off your balance in full each month or signing up for a credit card that has an APR rate that your budget can afford.
Balanced Annual Fee: It’s not impossible to find a cash back credit card that doesn’t charge an annual fee, but it may be tougher to find one with benefits as good as one that does. If you don’t want to pay too high of an annual fee or miss out on benefits that serve you best, the trick is to find a card with perks that outweigh the cost. A card that grants a 200 dollar statement credit for spending a reasonable amount within 90 days of opening your account, for example, would offset an annual fee of that amount or lower.
Accumulating Charges: All of the money that you could potentially earn back with even the best cash back credit card in your wallet would be meaningless if you’re stuck paying fees for using the card- and not necessarily irresponsibly either! Look out for high foreign transaction fees and balance transfer fees, as well as late payment fees if you already occasionally find yourself short at the end of statement periods.
Which Type of Cash Back Credit Card is Best?
When it comes to cash back credit cards, the important question to ask is not which one is best overall, but which one is best for your specific situation. The easiest way of deciding this is determining which cash back rewards structure you’d like to work with- flat, rotating, or tiered.
Flat rewards are the easiest to manage as they offer a set amount (also known as a flat amount) for all purchases you make on your card. It’s common to see cards with a flat reward return rate of 1% to 2%. While that may not sound impressive, the tradeoff comes in how easy it is to determine how much you’ll get back from your buys.
Rotating rewards feature different bonus categories each quarter that you have to sign up for in order for your purchases to qualify. They generally yield a higher return than flat rewards card, but you have to plan your purchases in advance in order to maximize your cash back earning potential. While one quarter may see you earning 3% cash back on travel expenses, that category may be gone in the following three months in favor of rebates on gas or warehouse club purchases.
Tiered rewards offer a comparably high return on purchases in a select category, but only up to a specific amount. After that, it’s common to see the cashback rate drop a low as 1%. A startup with a cash back credit card that rewards 5% on office supplies up to $2,000 a year may meet that limit in a single billing cycle, both limiting how much they can earn going forward but also getting a big cash back bonus upfront that can be used for other supplies.
You may not have the necessary credit to qualify for an unsecured credit card quite just yet, which is where secured credit cards come in. While the APR and benefits offered by some unsecured cards are often more appealing, they may also be far stricter when it comes to their application process in terms of evaluating personal income, assets, and other factors. In time, you’ll get there too.