It's true: Credit cards don't just take your money. Some of them put cash in your pocket.
Here's everything you've ever wanted to know about cash-back credit cards.
What is a cash-back credit card?
A cash-back credit card earns you a percentage of money back from your spending with the card. You can earn anywhere from 1% to 5% back from every purchase.
To get your cash, you may have to reach a certain threshold, such as when you have a balance of at least $20 in reward money.
You may take the cash as a check, or have it deducted from your credit card bill, or receive it in the form of a gift card.
Why do they give cash back?
Why are credit card companies so eager to give away money? When they give you rewards, card companies aren’t taking a loss so much as they’re sharing a profit.
Credit card issuers charge merchants fees for every transaction. With rewards cards, the issuers simply pass some of those earnings on to you.
For example, a card company may take 3% from merchants for each transaction. Rather than keeping all that money, the issuer may offer to give cardholders two-thirds of each fee (2%), to incentivize people to sign up for the card.
What are the types of cash-back cards?
Cash-back credit cards can be separated into three main categories:
- Flat percentage
- Tiered rewards
- Bonus category
Flat percentage cash-back cards are just as they sound — they pay cash back at the same rate for all purchases.
These cards are best for people who want decent returns without having to overthink it. The trade-off for this convenience is that you typically only earn 1% or 2% for each transaction.
Tiered rewards cards are great for people who tend to spend more on certain things.
If you do all of the grocery shopping for your household and a lot of the driving, a tiered rewards card that pays out a higher percentage for groceries and gasoline may be an excellent option. You’ll get a smaller return on other purchases.
Bonus category cards are for dedicated rewards earners. They offer high rebates of up to 5% in specific spending categories, such as at restaurants or at gas stations.
The bonus categories can change every quarter, and you may have to register, or "opt in," for the bonus category each quarter.
Your spending that earns the bonus may be capped at a certain amount, like $1,500 during the quarter, and purchases in other categories will likely earn you just 1% cash back.
How do you master cash-back rewards?
You want to choose a card that best suits your spending habits, and that won't lure you into spending more than you should, just to chase after rewards.
Never buy what you don’t need. Track your spending for a month, and pick a card that's tailored to what you already spend.
Always make sure you pay off your balance each month.
Credit card interest rates are at record highs, averaging around 17%. That's way higher than rewards earnings. Rolling over your balance for a couple of months can quickly eat away at your returns.
Follow us on Twitter: @moneywisecom