The idea behind cash-back credit cards is simple: For every dollar you charge, your credit card issuer gives you one to six cents. The more you spend, the more you get. A great deal, right?
But beware: Two traps await you. If you overspend and can't repay your balance in full every month, you will likely spend more in interest charges than the card issuer gives you in cash-back rewards. The other trap is in redeeming your reward. Some credit card issuers use tricky limitations to make redeeming your reward harder than you might expect.
Every cash-back credit card plan has its own rules and rewards. The trick to winning the cash-back credit card game is to know each card issuer's rules and then to pick the card that fits your spending habits.
Cash-Back & Rewards Credit Cards by the Numbers
Consumers who say they completely understand how to earn rewards points
Consumers who feel it takes too long to cash in on reward offerings
Average annual value of unredeemed rewards per household
Number of millennial consumers who prefer flexible or transferrable rewards to fixed perks (like cash back)
Over a third of consumers who don't know the value of their reward points
7 Key Features to Shop for in a Cash-Back Card
Most of the 1,100 credit card issuers offer cash-back cards. The issuers use the cash-back promise as a lure to attract new customers. Card issuers rely on six features to draw you in — but that does not mean all cash-back cards are created equally. Some offer most consumers terrible value, while others are good for many different types of consumers.
Pick your cash-back credit card like you would a new car and choose the one that fits your needs best. Here are the seven key features to look for:
One of the easiest ways to score quick cash when shopping for a cash-back rewards card is to pick one that offers a sign-on bonus. Bonuses are not the industry standard in cash-back cards, but some issuers are willing to throw money — in the form of bonus points — your way.
For example, American Express's Blue Cash Preferred Card gives new customers a $150 sign-on bonus after they charge $1,000 to the card. The catch is you must spend $1,000 within the first three months to earn the bonus. A careful shopper will find that the Chase Freedom card gives new cash-back customers a $100 sign-on bonus if they spend $500 in the first three months. Other issuers give bonuses, so look for this feature if you plan to spend a large amount on the card over the next 90 days.
Watch out for annual fees, but don't avoid all cards with fees automatically. Look at the fee in the context of the card's other features. For example, if you use your card at grocery stores and the cash-back percentage for grocery purchases is high, then paying a $50 or $70 annual fee might be money well spent.
Many issuers offer no-fee cash-back cards. Capital One Quicksilver Cash Rewards Credit Card and the Discover It are two examples of cards that have no annual fee.
Your spending habits must align with the card's reward program. A card with high travel rewards doesn't make sense if you don't travel. A card with rotating categories doesn't make sense if you're not the type of person who will pay attention to the flavor of the month — that is, the types of purchases for which the credit card company is issuing rewards during a certain time frame. (One time it could be veterinary services and roofers; another, it could be candy stores and motorcycle shops.). An Amazon card makes no sense if you rarely shop online. A 2 percent reward on groceries is great if you know you will remember to pull out that card at the checkout counter.
If you will not see a benefit to cash-back card, then choose a low-interest credit card.
Credit card issuers want your business as long as you're a potential profit source. Issuers set cash-back limits to prevent potential losses. Monthly and annual spending caps are typically found with cards offering high cash-back rates. Cards with low cash-back rates — 1 percent or so — tend to have higher caps.
It is common for credit card issuers to include significant conditions on how you earn a reward. For example, the Chase Freedom card gives you 5 percent cash-back, but Chase rotates the merchant categories every three months. To get the most out of a card with rotating merchants or categories, you must remember to check for the categories as you plan your shopping and use the right credit card for purchases that earn the highest rewards. If you're the type of person who likes coupons and Black Friday shopping, a card with rotating categories is right up your alley.
An interesting twist on earning points is found in the Citi Double Cash Card. You earn 1 percent when you buy and another 1 percent when you pay the balance. That's a great deal and encourages consumers to pay off their balances. Look for a card like the Citi Double Cash Card if you appreciate a little sweetener for paying your credit card bill.
Redemption varies by card issuer. Look for a card that allows you to redeem your bonus online and by calling a toll-free number. Typical options are:
Credit to your account
Direct deposit to your bank account
Gift card at a well-known retailer, such as Amazon.com
Some cash-back credit card issuers offer a 0 percent introductory interest rate. By law, the introductory rate must be six months, but 12 to 18 months is common for teaser rates. Your goal is to pay off the card monthly.
A card's interest rate matters if you can't pay off the entire balance. A cash-back card isn't right for you if you expect to carry a balance because the interest cost will exceed the cash back you receive.
The Best Strategy to Win at Cash-Back Credit Cards
Cash-back credit cards aren't for everyone. You must be strategic in your use to maximize the amount you receive. That means you must avoid carrying a balance each month. Cash-back credit cards have relatively high interest rates, and if you carry a balance you'll wipe-out your rewards.
Know Your Plan & Spending Habits
Know your purchasing habits. Compare your purchases against each card's:
Rewards emphasis - such as travel, entertainment, groceries, or gasoline
Annual fees (if any)
If you don't have reoccurring spending categories, then a general cash-back card is going will give you the most bang for your bucks. Sure it won't carry a 5 percent cash-back rate, but 1 percent without thought is better than nothing — assuming you don't misuse the card.
Cash-back cards with rotating categories give consumers the highest cash-back percentages, which means big savings if you plan your purchases each month or quarter. Most cards with rotating categories will list the categories for the next few months or even year, giving you the opportunity to maximize the amount you earn.
Let's say for January through March you get 5 percent cash back on grocery stores, movie theater tickets and Starbucks. Stock up on items that fall into that category during those months. Purchase gift cards for later use to boost the amount of cash-back you receive. If, for example, you are a Starbucks regular, you know you will eventually use an entire $50 gift card yourself. If gasoline is the category for three months then top-off your tanks and buy gift cards — yes, gas stations offer gift cards too — to maximize your rewards.
Carry Multiple Cash-Back Cards
Look for the ability to transfer your cash-back reward from one credit card account to another if you think you may want to give extreme credit card points accumulation a try.
Credit card points experts will carry two or more cards from the same credit card issuer, each offering a different amount of cash-back for each spending category. Some issuers will allow consumers to transfer the rewards from one card to another. For example, you may be able to transfer your double cash-back points for fuel purchases to a travel card to get free airline tickets.
If you plan to follow this strategy, you must stay organized to see the most benefits. You'll also have to know which card is for what and make sure you use them accordingly.
There's a dark side to cash-back credit cards. It's easy to get carried away with making money back on your purchases by overspending to max out the cash-back percentage. A Federal Reserve Bank of Chicago study found that consumers with rewards credit cards have more debt than people without rewards cards. Carrying a balance from month to month results in you paying interest, which more than erases the benefits of having a cash-back card.
Dissecting a Cash-Back Credit Card Offer
Not all cash-back credit card offers are treated equally. Here is how a credit card issuer might pitch a cash-back offer at you:
Card issuers want your business and will often offer you a sign-on bonus of around $100. But sometimes there are strings attached. With some cash-back cards to get the sign-on bonus you have to spend a certain amount of money on the card in a predetermined time period. A common offer: get $150 sign-on bonus after you spend $1,000 in purchases on your new card in the first three months.
Here, this card emphasizes gasoline and grocery purchases. Other credit card issuers change the categories every three months. Pick a card that matches your credit card use.
It's important to know exactly how much you can earn from your cash-back card, particularly if you have one with rotating categories. A card issuer may for example give you 5 percent cash-back on gas but the reward may only be good for the first $1,000 you spend and only for gas purchases in the summer.
Credit card issuers set limitations on the amount of cash-back you are going to receive. You may get 5 percent cash-back on your gas purchases but typically it's going to be capped at a certain amount. These cards also have exclusions which means you won't get any rewards when you shop at certain retailers.
Your redemption rights are the trickiest areas of cash-back cards. Learn if points expire, or if they can be taken away if you're late with a payment. Can you combine your points with points on another credit card issued by the same institution? Banks reserve the right to change the terms of their rewards programs or cancel them altogether at any time.
Cash-Back Credit Card Questions & Answers
Bruce McClary is the vice president of public relations & external affairs at the National Foundation for Credit Counseling.
What mistakes do people make with credit cards, and specifically rewards programs?
One of the biggest attractions of a cash-back card, the rewards, can also be the main reason people get in financial trouble. Sometimes the excitement over the possibility of redeeming points causes people to forget the practicality of the offer. The pursuit of points can lead to unmanageable debt, so can the process of redeeming rewards. Getting 5 percent cash back on groceries is great, but if you end up stocking the refrigerator with food that goes untouched to get that cash-back then it's actually costing you more.
Make sure there is a positive return on their investment for having and using the rewards card. A normal credit card is often going to have a lower APR. Without the allure of rewards, a consumer may actually use (a non-rewards card) less.
What are the gotchas about credit cards in general and rewards programs that are not well understood by consumers?
A trap cash-back card users often fall into is carrying a balance on their card. That's not the ideal situation with any credit card but because cash-back cards often have a higher APR than non-rewards based credit cards, it's a really bad idea. Carrying a balance means you are paying interest on your purchases, which will quickly erase any cash-back gains you hope to achieve.
Rewards-based cards have a lot of rules and restrictions that can be hard to navigate and can cost you if you use them incorrectly. That's particularly true of rotating cash-back cards. Blackout dates and tricky terms that restrict how points can be redeemed are common pitfalls for cardholders. It' to read the agreement very carefully to avoid unpleasant surprises like rewards that can't be redeemed or points expiring sooner than expected.
What advice can you give consumers about managing their credit cards and cash-back rewards cards?
Consumers must comparison shop and understand all the rules, restrictions and limitations of the card. They should also know what the APR is and how much it will cost them if they carry a balance. Cash-back cards can get you money back but you have to be disciplined and make sure you pay it off each month to benefit.
Ask yourself if you could live with the interest rate and other terms in a situation where there were no spending perks. The best offers are the ones where you would answer yes.
Surprises await people when they cash in on their rewards. When trading points for hotel rooms or airline travel you may be faced with restrictions added by those businesses. While earning the points may be easy, cashing in could be a headache.