Meet the rewards credit card! This is a special type of credit card that rewards you for your spending in cash back or points. A cashback reward entails receiving cash at the end of a month’s billing cycle. For general information, check out our article on how credit cards work.
Types of Cash Back Credit Cards
Flat-Rate Cash Back
Flat-Rate Cash Back offers a fixed percentage of cashback on a bill’s statement balance. This figure is usually 1% to 2%. The Citi Double Cash card is a prime example as it offers 2% cashback . You get 1% when you spend and 1% when you pay your bill on time. You can spend money anywhere at gas stations, grocery stores, or restaurants, and you will still earn the same flat rate!
Bonus Category Cash Back
Bonus Category Cash Back rewards select spending in a specific category such as dining or travel at a higher rate (e.g., 2% or 3%). Cards that offer bonus category cashback may offer a lower rate for purchases in other categories. For instance, the Amazon Prime Visa Card offers 5% cashback when you buy at Whole Foods grocery stores or Amazon websites, 2% on gas stations, restaurants, and drugstores, and 1% back on all other purchases. As a side note, the Amazon Prime card sometimes offers a bonus after spending a set amount. You can consider the annual Amazon Prime subscription as the annual fee for the card.
Rotating Category Cash Back
Rotating Category Cash Back features changing bonus categories that change automatically or allow you to choose a different category after a set time period goes by. The current category will have the highest rate, while others will have lower rate tiers.
One of the most well-known examples is the Chase Freedom Flex which offers 5% cashback on unique bonus categories each quarter. A cardholder must manually activate the higher reward rates each quarter to receive up to $1500 in cash back. This card has fixed rewards tiers for other categories and a general 1% rate for non-bonus categories.
Redeem Cash Back Rewards
You can earn cash back rewards in several ways, such as a cash check, bank account transfer (direct deposit), statement credit, or rewards points.
Cash checks mean you get cash as a check mailed to your house. A bank account transfer would directly move the cash from the card bank to your checking account. These methods usually require a minimum rewards balance and provide you with the most flexibility in redemption.
Statement credit refers to using the accrued cash back to pay off a card statement’s balance.
Turning Cash Back into Points
You can also transfer your cashback to the bank’s rewards points system. The cash is converted to rewards points at a fixed ratio. From there, you can redeem the points for retailer discounts, gift cards, travel, and more.
Perils of Rewards Credit Cards
A rewards credit card has a nasty side too. A credit card firm is like any other company — it will find a way to make its money and look after its bottom line. They do not offer these rewards out of the kindness of their hearts. Any credit card is great to have and can offer great benefits only if you pay them upfront and on time. Otherwise, the penalties easily beat out the benefits.
High APRs (Annual Percentage Rate)
APR is the annualized interest rate you pay on unpaid statement balances. APRs range from 14% to 25%. You would pay at least double in interest than the average annual stock market return of 7%! Credit card debt is one of the most expensive forms of debt to have, mainly due to how the high-interest rate balloons your expenses!
Cash Advance and High Interest
A cash advance is a short-term loan taken against your card’s credit line. You can use a cash advance to get cash from a bank branch or ATM – using your card to “buy cash.” Credit card firms are cautious of cash advances and do not offer them against the full credit line. Most cards have a separate cash advance line that is capped at a few hundred dollars.
You can easily get an advance but keep these downsides in mind:
- Cash Advance Fee – Card issuers charge either flat fees or percentage-based fees. Flat fees range from $5-$10 per advance, and percent fees can be as high as 5%. For context, if you take out a $300 cash advance, you could pay $45 in fees.
- Bank Fee – The bank that processes the advance will charge its own fees on top of those from the card issuer.
- Interest – Interest rates on cash advances are much higher than the regular APR, and the interest starts to build immediately.
Unfortunately, cash advances prey on the economically disadvantaged and often keep them in debt. Credit card debt from an advance is one of the most expensive and fastest-growing forms of personal debt. As an alternative, build an emergency fund with at least 3-6 months’ worth of expenses so you can get cash in a pinch without incurring debt.
Promote Excess Spending
The rewards on credit cards can entice a person to spend on certain things as they feel they are getting “something back” or getting a return. As the card swipes, the person’s brain gets a hit of dopamine, adding an extra reward to the purchase and reinforcing their use of that rewards card. This type of behavior quickly adds up, and a person realizes they spent more money than they otherwise would have saved if they did not use that card.
Credit cards are great tools if the user is a responsible spender and the card does not change their spending behavior. Enticing card rewards can promote excessive spending in some people. Those people should highly weigh the risk and benefits of using rewards cards. Ultimately, money saved can be invested or put to other uses that generate higher returns or utility.
Lowers Credit Score
High spending on credit cards incurs higher credit utilization. Credit utilization is measured by how much of a card’s credit line you use over the total credit available. For instance, if I spend $5,000 and my card has a credit limit of $10,000, I’ve utilized 50% of my credit line. Credit utilization makes up 30% of the credit score formula, which you can read more about here.
The formula incentivizes lower credit utilization rates and will drastically fall if users jump in their usage. It is recommended to keep this rate below 30% of the overall credit line. High spending can also mean underpayments or late payments, which will further ding your score. Payment history makes up 35% of your credit score, and a single missed payment can take several years before it is erased from your record.
Overall, keeping a strong credit score is advantageous as you can buy a car or take out a mortgage on a house and capture a lower interest rate – reducing the amount you payout in the long term.
Which Card to Choose
It’s up to you! Consider your personal financial situation and analyze your spending to see which categories you spend the most on. Choose the card that works for your spending style and needs. Everyone’s situation is unique, and a card should not make you spend more than you otherwise would. If you travel a lot, get a card with a high rewards rate for plane tickets and hotels. Keeping your personal situation in mind, here are well-known cash back rewards cards.
Citi Double Cash Card – To Earn Cash, At the Same Rate Everywhere
This card is a classic example of a fixed-rate card. You earn 1% back when you buy and 1% back when you pay your bill on time. The reward for paying your bill on time incentivizes routine and timely payments. Both your wallet and credit score will be happy!
Cash back rewards can be redeemed as cash or check after your rewards balance reaches a minimum of $25. Otherwise, you can redeem the rewards as a credit to your bill or convert them into Citi ThankYou points. Thank You points are used for donations, travel, gift cards, loan payments, donations, and discounts at select retailers. This card has no annual fee.
CapitalOne Quicksilver Card – Another Simple Cash Back Setup
If you’re looking for a straightforward card with a signup bonus, look no further. The Capital One Quicksilver Cash Rewards Credit Card offers a flat rate of 1.5% cashback on any purchase. You receive the $200 bonus after you spend $500 within the first 3 months. This card has no annual fee.
Bonus Breakdown & Comparison
The card competes well with the Citi Double Cash. To compare, one must spend:
- $10,000 with Citi Double Cash to earn $200 at a 2% rate
- $10,000 with the Quicksilver earns $342.5 in cash rewards ($142.5 in cash from $9,500 in spending)
Even with another $10,000 of spending in year 2, the Quicksilver comes on top with $492.5 in total rewards. That’s $92.5 more than what the Double Cash will allow you to earn.
Putting the cards head-to-head reveals that Quicksilver will net you more rewards within the first few years with the sign-up bonus. Unless a person is a high spender like in the breakdown above, it is more advantageous to stick with the Quicksilver with the sign-up bonus. If there’s no bonus offered between the cards, then the Citi Double Cash wins out.
These days 1.5% on your cashback card is low compared to what you get with specialized cards or combinations.
Blue Cash Preferred Card from American Express – Cash Back for U.S. Supermarkets and Netflix
If you like Netflix and food, this is the card for you. With Blue Cash Preferred, you earn the highest rate of 6% when you shop at U.S. supermarkets and subscribe to select U.S. streaming services. That 6% back at U.S. groceries has an annual spend limit of $6,000. You also earn 3% cashback on transit (trains, rideshare, parking, tolls, etc.) and gas stations. Otherwise, you get 1% back on all other categories. The current sign-up offer includes a $350 bonus as you:
- Earn up to 20% from Amazon.com purchases in the first 6 months – up to $200
- Earn $150 back after spending $3,000 within the first 6 months
To get that bonus, you’ll have to spend:
- $1000 in Amazon purchases
- $4000 in total purchases
In total, that $4,000 spend earns 8.75%.
Blue Cash Preferred Card gives cashback in the form of statement credits, which reduces flexibility in redemption options. The high cashback rates compensate for the lack of redemption options. If you spend more in those categories, then getting this card makes sense for you.
Annual Fee Breakdown
The card also comes with an annual fee of $95. For context, you’ll break even with this fee if you spend:
- $1,583.33 on groceries / streaming
- $3,166.67 on transit / gas
- $9,500 on everything else
DiscoverIt Cash Back Card – To Earn Cash on Select Categories
This card is a beginner’s way into the rotating bonus reward space. A cardholder earns 5% back on up to $1,500 in purchases on select categories each quarter. The user must activate the rewards each quarter. The user earns 1% back on other categories.
This card can come with a bonus after you spend a set amount. You can redeem cash back as statement credits, donations, direct deposits, gift cards, or shopping on Amazon and PayPal. You get cash back in any amount except for gift cards, where redemption starts at $5. Also, this card has no annual fee.
Cashback Works for You & Your System
Cash back cards can be great tools in your personal finance system. Used well, these cards can give you a little something back for your usual spending. Your options to redeem your cash back can matter even more than the rates you earn on. The flexibility of applying rewards is what makes each card unique and ultimately valuable to each user’s needs. Over time these rewards can add up to fund a new purchase, cover a nice vacation, or buy your friends a dinner. Remember, these rewards are discounts that you receive as cash back. In essence, your rewards can be saved or invested in helping fund your financial future and life!