If you want something back every time you spend money, cash back credit cards are by far the easiest option. There are no points or complex redemptions with this type of rewards card. You pay with your credit card and get cash back on your purchase.
It is normal to have a few questions before opening a cash back card, such as how it works and the types of cash back cards available. In this guide, you’ll learn all about cash back rewards and how to choose from the best cash back credit cards.
How do cash back credit cards work?
Cash back credit cards are one of those products whose name gives you a clear idea of how it works. When you use a cash back card, you earn a percentage of the transaction amount as cash back. The exact percentage depends on the card and, with some cash back credit cards, the expense category of the purchase. For example, a card might earn a higher percentage when used in an office supply store or restaurant.
Let’s say you spend $ 100 with a cash back credit card that earns you 1% cash back. You would earn $ 1 in cash back. If this card had a 2% cash back rate, you would earn $ 2. You will continue to earn Cash Back Rewards until you decide to redeem what you have earned.
Most transactions, but not all, will be eligible for cash back. Card issuers usually don’t let you earn on cash advances and balance transfers. You also cannot earn Cash Back on purchases of cash equivalent items, such as gift cards and person-to-person payment services, such as Venmo. Each of these exceptions will be specified in the terms and conditions of your card.
How to redeem cash back
You can redeem Cash Back Rewards through your credit card account online or by contacting your card issuer. Some credit card companies have repayment minimums, such as $ 20 or $ 25. Fortunately, many card issuers now allow you to exchange any amount of cash with their credit cards.
Refund methods vary, but generally include one or more of the following options:
- Credit statement: Apply your cash back to your current credit card balance. This is usually the easiest option, unless you are not using your card much and have more money than your current balance.
- Deposit to bank account: Deposit your money into a bank account that has been linked to your credit card.
- To verify: Receive a check in the mail for your cash back.
- Gift card: Use your cash back to purchase a gift card. Even though cash is more useful than a gift card, sometimes stores have offers where you can get gift cards for less than face value.
The different types of cash back credit cards
There are three types of cash back cards, the difference being how their cash back rates are set up.
Lump sum cash back credit cards
A popular choice if you’re looking to have just one credit card, a flat rate cash back card lets you get the same rate on all of your expenses. While 1% was the most common cash back rate, 1.5% has become the new standard for flat rate cards.
The downside to these cards is that there is no potential to earn a higher bonus rate. You might be leaving money on the table if you usually spend a lot in a specific expense category. The good news is, you’ll get a great rate every time you use your card.
Bonus category cash back credit cards
With bonus category cash back credit cards, the amount you earn depends on the purchase. These cards can earn 2%, 3% or more on qualifying purchases in certain fixed expense categories. For example, if you have a credit card that earns 3% on gasoline, you will earn $ 3 on a $ 100 gasoline purchase.
Some cards limit the amount of bonus you can earn. You can find cash back credit cards that offer bonus rates of up to $ 1,500 in purchases per quarter or $ 6,000 per year. Others have unlimited bonus categories. In any case, all expenses other than bonuses will earn a flat rate, which is usually 1%.
If you find a card with bonus categories that match your spending habits, you might earn a little more using it.
Rotating Bonus Category Cash Back Credit Cards
These cards work the same as the cards above, only the bonus categories change at predetermined intervals, most often quarterly. So your card could earn 5% in restaurants for three months, then 5% in grocery stores for the next three months.
Your credit card company may provide all bonus categories for the year in advance, or it may not release them until the start of a new quarter. You will usually need to activate these categories with the card issuer to get the bonus rate for that quarter.
The biggest advantage of these cards is that they often have the highest bonus rates. However, there is no guarantee that the bonus categories will be areas where you will be spending a lot of money. For this reason, consumers often get a lump sum cash back card to pair with a rotating bonus category card.
What to look for in a cash back credit card
With all of the available cash back credit cards, it can be difficult to try to pick one. You can make the decision easier by narrowing it down to a few important features.
Cash Back Rate: Everyone wants the card that will earn them the most. I recommend that you review your monthly spending, figure out where you’re spending your money, and choose a card with cash back rates that match your spending.
Annual subscription : If you’re not too keen on paying an annual fee for a credit card, you’ll be happy to know that most cash back cards are no annual fee cards. There are a few that charge an annual fee, but they usually have higher cash back rates as well.
Registration bonus: Many cash back cards have signup bonuses. A sign-up bonus can also be referred to as a welcome bonus or a welcome offer. This is a good way to earn even more soon after getting the card. The most common type of signup bonus is to achieve minimum spend. For example, some cards offer a $ 200 cash bonus if you spend $ 500 in the first three months after opening the account.
Other uses of cash back credit cards
A common added benefit of cash back credit cards is an introductory 0% APR offer. This can apply to purchases, balance transfers, or both. If a card offers an introductory offer like this, you won’t have to pay any interest on that type of transaction until the introductory period ends.
These offers open up new ways to use cash back credit cards, including:
While these introductory offers can be helpful, make sure you understand the terms and be careful how you use them. You’ll pay a balance transfer fee with most cards, so consolidating your debt will likely cost you money up front. Once your introductory period is over, you will need to pay interest on any remaining balance.
You wouldn’t want to get reckless and spend more just because you have a 0% introductory APR. Only use one of these offers if you really need to.
A cash back credit card is right for you if:
- You want to make your usual expenses profitable without complicating your life.
- You want a card with no annual fee.
- You are looking for a card with an introductory APR of 0%.
Just about anyone with good financial habits can benefit from cash back credit cards. If you are a frequent traveler, there is a good chance that you will get more value from travel rewards cards. But if you don’t travel often or prefer to keep it simple, you can’t go wrong with a cash back card.