Cashback credit cards are a fantastic way to earn rewards on everyday spending, essentially putting money back in your pocket for purchases you’re already making. But with so many options available, understanding how cashback works, the different types of cards, and how to maximize your rewards can feel overwhelming. This guide will break down everything you need to know about cashback credit cards, helping you choose the right card and make the most of your rewards.
Understanding Cashback Credit Cards
What is Cashback?
Cashback is a type of credit card reward that gives you a percentage of your spending back as cash. This cash can be redeemed in several ways, depending on the card issuer, including:
- Statement Credit: Applied directly to your credit card balance, reducing the amount you owe.
- Direct Deposit: Transferred to your bank account.
- Check: Mailed to your address.
- Gift Cards: Redeemed for gift cards at various retailers and restaurants.
Unlike points or miles, which require some calculation to determine their value, cashback is straightforward. One percent cashback means you receive $1 back for every $100 you spend.
How Cashback Works
When you use your cashback credit card to make purchases, the card issuer tracks your spending and calculates the cashback you’ve earned. This cashback typically accrues throughout your billing cycle and is available for redemption at the end of the cycle or when you reach a specific threshold.
Example: If you have a card that offers 2% cashback and you spend $500 in a month, you’ll earn $10 in cashback.
Why Choose a Cashback Credit Card?
Cashback cards offer several benefits over other types of reward cards:
- Simplicity: The value of cashback is easy to understand and use.
- Flexibility: You can use your cashback rewards however you want, unlike travel rewards which are restricted to specific airlines or hotels.
- Accessibility: Cashback cards are generally easier to qualify for than premium travel cards.
Types of Cashback Credit Cards
Flat-Rate Cashback Cards
Flat-rate cards offer a consistent cashback percentage on all purchases, regardless of the category. These are ideal for simplicity and are a great option if you don’t want to track bonus categories.
Example: A card offering 1.5% cashback on all purchases.
Tiered Cashback Cards
These cards offer different cashback percentages based on the spending category. They typically feature higher rewards for popular categories like gas, groceries, and dining.
Example: A card offering 5% cashback on gas and groceries, 2% on restaurants, and 1% on all other purchases.
Rotating Category Cashback Cards
Rotating category cards offer high cashback percentages (typically 5%) on specific categories that change each quarter. These cards require more effort to track the bonus categories, but can yield significant rewards if used strategically.
Example: A card offering 5% cashback on gas stations in Q1, grocery stores in Q2, restaurants in Q3, and online shopping in Q4. It’s crucial to enroll each quarter to activate the bonus categories.
Choosing the Right Type
The best type of card depends on your spending habits:
- Flat-Rate: Best for those who want simplicity and don’t want to track spending categories.
- Tiered: Best for those who spend heavily in specific categories like gas or groceries.
- Rotating Category: Best for those who are organized and willing to track rotating categories to maximize rewards.
Maximizing Your Cashback Rewards
Track Your Spending
Understanding where you spend your money is crucial to maximizing your cashback rewards. Review your credit card statements and categorize your spending to identify areas where you can benefit most from tiered or rotating category cards.
Optimize Category Bonuses
If you have a tiered or rotating category card, make sure to use it for purchases in the bonus categories to earn the highest cashback percentage. For example, if your card offers 5% cashback on gas, use it exclusively for gas purchases.
Pay Your Balance in Full
To truly benefit from cashback rewards, you must pay your credit card balance in full each month. Otherwise, the interest charges will negate any rewards you earn.
Avoid Overspending
Don’t be tempted to spend more than you normally would just to earn cashback. Stick to your budget and use your credit card responsibly.
Utilize Cashback Boosts & Offers
Some credit card issuers offer temporary cashback boosts or bonus offers for specific retailers or categories. Keep an eye out for these promotions and take advantage of them when relevant to your spending.
Things to Consider Before Applying
Credit Score Requirements
Most cashback credit cards require a good to excellent credit score. Check your credit score before applying to increase your chances of approval.
You can get your credit score for free from various sources, such as Credit Karma, Credit Sesame, or your bank.
Annual Fees
Some cashback credit cards charge an annual fee, while others don’t. Consider whether the rewards you expect to earn outweigh the annual fee. Many cards with no annual fee offer excellent cashback rates, making them a great option for most consumers.
Example: A card with a $95 annual fee should provide at least $95 in cashback rewards to make it worthwhile.
Interest Rates (APR)
The Annual Percentage Rate (APR) is the interest rate you’ll be charged if you carry a balance on your credit card. Look for a card with a low APR, especially if you tend to carry a balance. However, the best practice is to always pay your balance in full to avoid interest charges altogether.
Redemption Options
Consider how you prefer to redeem your cashback rewards. Some cards offer more flexible redemption options than others. If you prefer direct deposits, make sure the card offers that option.
Conclusion
Cashback credit cards are a valuable tool for earning rewards on everyday spending. By understanding the different types of cards, optimizing your spending habits, and choosing a card that fits your needs, you can maximize your cashback rewards and put money back in your pocket. Remember to always pay your balance in full and use your credit card responsibly to avoid interest charges and maintain a healthy credit score. With a little research and planning, you can leverage the power of cashback to reach your financial goals.