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We all know money doesn't grow on trees, but the closest thing might be getting a cash back credit card.
A cash back credit card is a type of rewards card that gives cardholders a percent of their spending back as an incentive. If you use your card frequently, you could accumulate a decent amount of cash back, but it's important to make sure you aren't overspending just to net these rewards.
What Are the Different Types of Cash Back Cards?
There are several varieties of cash back credit cards, and which one is best for you depends on your spending behavior, credit scores and other factors. Here are the main types of cash back cards:
- Flat rate card: Some cash back cards offer a flat rewards rate, which means no matter how much you spend or what you buy, you will earn the same percent back—often 1%. Flat-rate cards don't give you a ton of earning potential, but are a no-brainer if you prefer to always know what you'll get.
- Tiered card: If you're hoping for a higher earning potential from your cash back program, consider a tiered card. With this type of rewards credit card, purchases earn a different rate of cash back depending on what you buy or where you buy it. For example, you might earn 3% cash back for every purchase on travel and restaurants, 2% on groceries and 1% on everything else. If you're a frequent traveler, or a frequent diner, it could be smart to get a card like this that gives you a higher rate of cash back for a category you're already spending a lot of money in.
- Bonus category card: Still other cash back rewards cards offer rotating bonus categories. With these cards, there's typically a low flat rate (such as 1%) for most purchases, but higher rates (usually 3% to 5%) for spending in bonus categories that may change every month or quarter. For example, you might get that higher cash back rate for every gas purchase one quarter, then the next quarter you'll get an additional bonus for spending at restaurants. These cards take a little more work since you have to stay on top of the changing offers, and some issuers require you to register for the bonus categories in order to get them.
How Does Cash Back Work on Credit Cards?
Some credit cards have rewards programs that earn you points or miles that can be redeemed for travel or merchandise. But if you prefer a simpler program, and more direct access to cash rewards, you're better off with a cash back card.
Cash back credit cards work by essentially giving you a rebate on your purchases. Typically, your issuer will give you the choice of how you receive the cash back: You can usually choose either to have it applied to your balance as a statement credit or as direct deposit to a checking or savings account. Some card issuers also still allow you to receive it as a check.
Depending on your card, you may also have the option to redeem your cash back rewards for other things, such as gift cards, travel reservations or merchandise. Before you apply for a cash back card, read the terms carefully so you understand your reward redemption options.
How Do I Choose the Right Cash Back Card?
With so many appealing cash back cards available these days, it can be hard to narrow down the best option for your wallet. Be aware that a good to excellent credit score is typically required to qualify for the best cash back credit cards, so if your credit isn't stellar, you might need to work on improving it first.
As you compare cash back cards, first look at some of the basic terms that you would review anytime you're shopping around for a new credit card. The card's annual percentage rate (APR) is an important factor, especially if you plan to carry a balance. A high interest rate can take a bite out of your cash back rewards, so consider a low interest credit card if you don't think you'll be able to pay off your balance every month.
Next, check to see if there's an annual fee. Annual fees are another expense that can take away from your cash back earning potential, but paying a fee could be worth it on high rewards rate cards. Some card issuers waive annual fees for the first year you have the card, so be sure to reassess the card's value once the fee kicks in.
Once you've narrowed down your list a bit, it's important to closely compare the cards' benefits and rewards programs. Take a close look at the terms of each cash back program since they can vary significantly from card to card, with different limits or exceptions that may change the appeal of the card.
As you're going over card terms, keep an eye out for rewards restrictions or limits: Some cash back cards put a cap on how much you can earn in certain categories. For example, you might earn a quarterly cash back bonus rate on up to $1,500 in gas station spending, with any spending beyond that earning the regular rate. Read the card terms carefully before you apply to avoid any surprises.
You may also want to consider if there's a sign-up or intro bonus, which some cash back cards offer as incentives. These bonuses typically provide a sizable cash reward if you spend a certain amount within a few months of opening the card.
How to Use Your Credit Card Responsibly
Earning cash back is a great perk of some credit cards, but you can't let that benefit lure you into irresponsible spending behavior. Make sure you're familiar with how credit cards work and how to use them wisely and to your benefit rather than your detriment.
Spending in excess just to earn rewards isn't a smart strategy, since that spending will almost certainly cost more than the benefit of the cash back. Plus, if you spend beyond your means and end up carrying debt, you'll have to pay interest on it, which will further negate the potential cash back rewards.
The smartest way to use a cash back card is on everyday purchases you would have made anyway (like the ones that would normally go on your debit card). Then, pay off these purchases every month in full and on time every month. This way you'll get the most out of your rewards card without paying interest or accruing debt.
There's another reason why carrying a balance in the name of rewards is a bad idea: Having a high credit utilization ratio can hurt your credit. Your credit utilization ratio measures how much credit debt you have compared with your total available credit limit, and it plays a big role in your credit score. A ratio above 30% can make you look riskier to lenders and creditors and harm your credit score.
Find Out if You'll Qualify
The perks of a cash back credit card can be substantial if they're used on everyday purchases and paid off quickly. However, these cards are difficult to qualify for if you don't have excellent credit. Not sure where your credit score currently stands? Check your credit report for free on Experian.
When the time comes to find a cash back rewards credit card, Experian CreditMatch™ can pair you with a card that suits your goals and credit score.