What to Consider When Choosing a Cash Back Credit Card
Cash back credit cards are a crowd pleaser when it comes to consumers who love the idea of earning real value from their everyday spend. However, cash back cards are not all equal. You need to consider three main components of value: reward rates, annual fees and redemption flexibility in order to make the most money from your purchases without giving up too much cash along with them.
Reward Rates
It’s the reward rate that decides how much cash back you earn on each purchase. The vast majority of cards provide a flat rate (for instance, 1.5% on all purchases) or tiered rates (like, 3% at groceries places, 2% with gas stations and thereafter far more). You need to think about your own spending habits when considering cards.
A tiered card, for example, may provide robust returns on dining and travel if you spend heavily in those categories. But evidence the stock market, tiered cards tend to have quarterly activation requirements or spending caps that can constrain your earnings. Flat-rate cards are more boring but, being simple and predictable, they can have their place for those who want to not track categories.
Make sure to always look for whether or not a card has some form of lifetime cap on cash back per month, or year where there is no limit but the return percentage caps earnings when you spend beyond that threshold associated with your higher rate credit.
Annual Fees
Net cash back can be adversely affected by annual fees. A good place to start are the tons of great cash back cards that have zero annual fee. On the other hand, select premium cards have fees as low as $50 to several hundred dollars or even in excess of 500 bucks for some — typically trading much more rewards or larger value opportunities such as travel credits or purchase protection.
When deciding if a fee is justified, figure out your projected cash back for the year. If, for instance, your spending was broken into the “No Fee” card at 1.5% back on $15k annually you received $225 of value a year in return. A $95-fee card that earns 2% on the same spending will net you $300 minus your fee, leaving you with just $205 — less than what you'd earn using a no-frills option. Consider an annual fee, only if the additional benefits far outweighs the cost.
Redemption Flexibility
Getting cash back is only the first half of that battle; redeeming it easily and conveniently is its second. Others provide automatic statement credits, direct deposits to your bank account and sometimes even check mailing. Others have a minimum redemption threshold (like $25) that you must meet before you're able to claim your cash back.
Some cards set deadlines on the cash back you earned, while others allow redemption only for certain gift cards or merchandise—scrubbing your rewards of value. The one with the highest flexibility is where you can redeem any amount at one point in time without worrying about what, when or how. And watch out for so-called “cash back,” which is in practice redeemable only for travel and online purchases—this usually means a hybrid rewards program.
Conclusion
When selecting the best cash back credit card, it is not all about finding a higher advertised rate — the key to choosing between cards that offer you returning an amount of your money paid has to do with structuring it in line with your lifestyle. Your journey begins with an analysis of your spending habits on a monthly basis.
Next, compare rewards rate and determine what your net benefit after annual fees will be, choose flexibility when redeeming. A simple card that provides fee-free unlimited 1.5% cash back to be used for instant statement credits may do you better than a complex category crunching 5%-cashback, high-fee (annual or monthly), with constraining redemption rules type of revolver. Narrow in on these three elements, and your cash back card will actually pay you.
