How to Choose a Cash Back Credit Card

Choosing the right cash back credit card can boost your savings on everyday purchases, providing an effortless way to earn rewards that are simple to understand and redeem. The key to maximizing your rewards is selecting a card that mirrors your spending habits, focusing on areas where you spend the most, like groceries, dining or fuel. By aligning the card's reward categories with your regular expenses, you can get more out of the card, making every dollar you spend work harder for you.

Whether a cash back credit card with an annual fee is worth it depends on your spending habits and the benefits the card offers. Cash back credit cards with annual fees often provide more generous rewards and additional perks compared to no-annual-fee cards, but you need to consider whether these benefits outweigh the costs.

Here's a simple formula to represent this calculation:

Net Cash Back = Total Expected Cash Back – Annual Fee + Sign-Up Bonus (if applicable)

Once you have your net cash back value, you can compare it to the annual fee. If the net cash back is greater than the annual fee, the card may be worth it. If the annual fee exceeds the net cash back, you might want to consider other credit card options without annual fees or with more favorable terms.

To pick the best cash back credit card for you, start by tracking your spending over the next one to three months, or look at your last few card statements to see where your money goes. Remember to watch for seasonal changes in your spending, as these can affect which categories you want to focus on.

Break your expenses into groups, such as groceries, dining out, travel and gas. This will show you where you spend the most often and the most money. Some card companies even provide reports showing expenses per category to make things easier. This step will help you get a clear picture of your spending habits and guide you in choosing a cash back card that really pays off.

In addition to evaluating your spending habits, knowing your credit score is helpful so you can shortlist the cards you’ll be eligible for. Most cash back credit cards on our list require a credit score of 670 and above (Good to Excellent credit rating), but cash back cards for fair credit are also available.

Credit score eligibility is an important factor to consider since applying for a card hurts your credit score. If you’re shopping around to see which credit card suits you better, you can ask if you’re prequalified instead. With prequalification, you only need to submit basic information and estimates, and from there, the card company will assess whether you’ll likely get approved.

While prequalification and credit score eligibility do not guarantee final approval, they can minimize the potential negative effect on your credit score from applying for cards beyond your qualification range.

The next step is to choose the type of cash back that aligns with your spending. There are different cash back programs out there, but they can usually be categorized into three types:

These cards offer a consistent, flat percentage of cash back on all purchases, regardless of the category. For instance, if a card offers 1.5% flat-rate cash back, you'll earn 1.5% back on every purchase, whether for groceries, gas or entertainment.

This card type is better suited for users who spend evenly on different categories or want a simple and straightforward cash back program that requires no effort to track spending categories or activate categories every quarter.

The usual cash back rate for flat-rate cards ranges between 1% and 2%. Here are some of our recommendations:

>>>MORE: Wells Fargo Active Cash® Card vs. Citi Double Cash® Card

With these cards, different spending categories have different cash back rates. For example, you might earn 3% back on dining, 2% on gas and 1% on all other purchases. The card issuer predefines the tiers or categories and remains consistent throughout the year. If you tend to spend more on one category than the other, this card is for you.

Cash back rates for categories range between 1% and 5%. If you’re looking for a cash back card that rewards you more on one or more categories, here are our recommendations:

These cards offer higher cash back percentages on specific categories that change, usually quarterly. Cardholders might earn 5% on groceries in one quarter and 5% on gas in the next quarter. However, there's often a cap on how much you can earn in these rotating categories. Cardholders typically need to activate or enroll each quarter to earn the higher rate. If you don’t mind the extra work, you’ll find that this type of cash back card can offer substantial rewards.

The cash back rate for these cards is usually between 1% and 5%. Users of these cards typically pair them with flat-rate or bonus category cards for maximum benefit. Here’s our pick of cards with rotating categories:

When evaluating cash back credit cards, it's wise to consider welcome offers. These offers often promise a substantial cash back bonus, but it's important to dig into the details before making a decision.

Here's how to weigh these introductory bonuses:

• Look at the Bonus Amount: A $150 cash bonus might catch your eye, but check the requirements.
• Consider the Spending Requirement: For example, you might need to spend $1,000 in the first three months to qualify.
• Check the Time Limit: Some offers give you more time to meet the spending threshold.

Pay attention to the time limit to achieve the welcome offer. If the time frame is too short, you might find yourself making unnecessary purchases just to get the bonus. Remember, the goal is to benefit from the card, not to change your spending habits detrimentally.

Lastly, consider the long-term value of the card. A welcome offer is just the beginning. Ensure the card continues to offer benefits that align with your spending patterns. Sometimes, a slightly lower welcome offer is a better fit due to better overall cash back rates or additional perks.

When choosing a cash back credit card, fees and interest rates impact the actual value you receive from the card. Here are the key items to consider:

• Annual Fee: Some cash back cards charge an annual fee ranging from modest to substantial. While cards with fees might offer higher rewards or additional benefits, it's crucial to calculate whether your potential cash back will offset this cost.
• APR (Annual Percentage Rate): This is the interest rate you'll be charged if you don't pay off your balance in full each month. High APRs can quickly cancel any rewards you earn, especially if you carry a significant balance.
• Foreign Transaction Fees: This fee can add up if you travel or make purchases internationally. Some cards charge a fee (often around 3%) for transactions made outside your home country.

Determine how these fees may impact you relative to your typical spending patterns.

Understanding how to redeem your cash back is just as important as earning it. Most cards offer several redemption options, including statement credits, direct deposits and checks. Some cards, like the Wells Fargo Active Cash® Card, allow for easy redemption as a statement credit or direct deposit, which can be the most straightforward method. Or take Costco Anywhere Visa, where you’ll receive an annual cash back certificate you can redeem as cash or merchandise at U.S. Costco warehouses.

Other common options include gift cards and merchandise, though they may not always provide the best value. The value of your cash back or rewards might differ depending on how you redeem them.

Be wary of redemption methods that seem overly complex or restrictive. For example, some cards may require a minimum amount of cash back before redeeming them, which can be inconvenient if you're looking to access rewards quickly. Conversely, cards that allow you to redeem cash back at any time, without expiration or minimum thresholds, like the Citi® Double Cash Card, tend to be user favorites.

Always check the redemption terms to ensure you're getting the full value of your cash back without unnecessary hassle.

After comparing cards’ welcome offers, cash back rates, redemption policies and fees, all that is left is to apply for the card.

You may choose to get a cash back credit card that rewards you for every dollar spent. While most cash back credit card users use points earned as statement credit, you also have the option to use it to pay for airline tickets, hotel night stays, gas or dining, depending on the card you choose. Be sure to read the terms and conditions so you don't lose any points.