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Cashback Credit Cards: 5 Differentiators You Need To Know

29 Nov 2023 by

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Cashback Credit Cards Are Not Created Equal

Do you have a cash rewards credit card? If you read our article on cashback stacking, you already know having one (or more) cash reward cards allows you to benefit from a potent double delight when it comes to maximizing cashback rewards. If you don’t have a cash rewards card currently, before you run out to grab one, there are a few things you should know to help you make the right selection. Cashback credit cards are a diverse category with plenty of options for various types of consumers. While the fundamental concept of earning cashback on purchases remains consistent, the specific terms, conditions, and reward structures can vary significantly from one card to another.

Due to these differences, all cashback cards are not created equal – for example, categories, rates typically offered by each type and various redemption options. Read on to learn more about the factors that differentiate between card types.

Factors That Differentiate Cashback Credit Cards

Cash reward credit cards can vary significantly. In order to select the card(s) that align with your spending habits, its important to be aware of these differences. Doing so will allow you to make a informed decision when it comes to selecting a card. The 5 key factors to hone in on when picking a card follows:

  1. Reward Categories
  2. Cashback Rates
  3. Introductory Offers
  4. Annual Fees
  5. Redemption Options

Reward Categories

One of the most notable differences among cashback cards is their range of reward categories. Some cards may specialize in cashback rewards in niche categories. For example, categories such as groceries, dining, gas, or travel. Some cards take the category approach but rotate the categories quarterly. And other cards provide flat rates of cashback on all purchases. The advice from the subject matter experts is to select the rewards card that best aligns with your spending patterns and preferences.

This advice can be extended to securing multiple cards for more complete and predictable coverage. For example, you find a rotating card that offers 5% on categories that change every quarter. The categories offered may align with your purchase history, but due to their rotation, there’s no guarantee that the category selection will fit your needs from quarter to quarter. The high rates make rotating categories very attractive, but the variability makes them less predictable. To offset this, you could also select a good flat rate card that pays 2% on all purchases. Generally speaking, the flat rate card will earn you more on purchases that are not covered by the rotating category card’s minimum rate.

The flat rate card offers less cash rewards than the bonus amounts of category specific cards. However, the flat rate card does provide for stable and predictable rewards. By having the option of utilizing multiple cards with varying reward structures, you can ensure you are capturing the most cashback possible.

Cashback Rates

We’ve already touched on this above in the reward categories section, but there are differences even between cards operating within the same reward categories; cashback rates can vary significantly. For example, one flat rate card might offer 1% cashback on all purchases, another may provide 2% or higher. This variation can be even more pronounced in specific categories. For instance, you might find cards that offer 3% cashback on dining and entertainment while others offer 5% or more. Cashback rates vary significantly depending on the specific credit card, issuer policies, and the type of transactions.

In general, cashback rates can vary in one of two following ways:

  1. Tiered Cashback Rates: Many cash reward cards feature tiered structures, where the cashback rate varies based on the type of purchase or spending category. For example, a card might offer a higher cashback rate for purchases at grocery stores, gas stations, or restaurants and a lower rate for all other expenditures.
  2. Flat-Rate Cashback: Some cash reward cards provide a flat-rate cashback on all purchases, regardless of the spending category. This simplicity appeals to individuals who prefer straightforward rewards without the need to track or optimize spending in specific areas.

Introductory Offers

Credit card issuers frequently entice new cardholders with attractive introductory offers. These can include bonus cashback rewards for meeting a minimum spending threshold within the first few months. Some cards may offer 0% introductory APR (annual percentage rate) on purchases, making them particularly appealing if you plan to carry a balance.

But one word of caution on introductory offers…don’t get too comfortable. The APR after the honeymoon phase is typically quite a leap. Make sure if you are planning to carry a balance that you can get it paid off before the introductory rate expires. Otherwise what initially looked like a good offer quickly becomes a ball and chain. It might make more sense to secure a card with a much lower rate than one with a low introductory offer that jumps to more than 28%; at least in the long term. By taking the future rate into consideration, you can more easily determine if the card fits your risk profile.

Annual Fees

Quite often, the higher cashback rates are tied to cards that charge an annual fee. These fees should not necessarily be a deal breaker for you, though. You can determine the value by analyzing your spending habits and reward offerings with just a little number crunching. For example, at the time of this article, American Express offers their Blue Cash Preferred cashback rewards card for $95 annually with the first year free.

This card offers 6% cash back at supermarkets, up to $6,000 annually, 3% on gas, and 1% on other eligible purchases. If you spend $5,000 annually on groceries, you are still ahead by $200, even with the annual fee.

Running the numbers on the category rates offered on the annual fee cards and how they align with your spending habits could prove lucrative. In short, do your due diligence; the higher rates often offered by the annual fee cards could significantly outperform no-fee cards, especially if the high-rate categories are aligned with your regular purchases. The decision to pay for a card charging an annual fee needs to consider the overall value you expect to derive from the card before making a decision.

Redemption Options

Another factor to consider is redemption options. It’s important you understand what the card offers. Most options are pretty straight forward, but not always. Some will offer cash, others a statement of credit and still others will offer gift cards.

Common Cashback Reward Redemption Options

  1. Statement Credit: The simplest and most common option is to redeem your cashback as a statement credit. This means that the cashback amount is directly applied to your credit card balance, reducing the amount you owe.
  2. Direct Deposit: You can also choose to have your cashback rewards deposited directly into your linked bank account. This allows you to access your cashback funds immediately and manage them as you wish.
  3. Travel Rewards: Many cashback cards offer the option to convert your cashback into travel rewards. This means you can redeem your cashback for airline tickets, hotel stays, car rentals, and other travel-related expenses.
  4. Merchandise: Some cashback programs allow you to redeem your cashback for merchandise, such as gift cards, electronics, appliances, and other items. This can be a convenient way to use your cashback rewards for everyday purchases.
  5. Donations to Charity: If you’re feeling generous, you can also choose to donate your cashback rewards to your favorite charity. Many cashback programs offer direct donation options, allowing you to make a positive impact while also utilizing your cashback earnings.

Factors to Consider When Choosing a Redemption Option

  • Flexibility: Consider which redemption option provides the most flexibility for your needs and spending habits.
  • Value: Evaluate the value you receive from each redemption option. For instance, statement credit directly reduces your debt, while travel rewards may offer higher value depending on your travel expenses.
  • Fees: Some redemption options may involve fees, so be sure to factor these in when making your decision.

Tips for Maximizing Cashback Redemption

  1. Choose a card with cashback categories that align with your spending patterns.
  2. Utilize introductory offers and promotions to earn more cashback.
  3. Monitor your cashback balance and redeem it regularly to avoid expiration dates.
  4. Consider the value proposition of each redemption option to maximize the benefits of your cashback earnings.

Making an Informed Choice

The variety in cashback credit cards can be both a blessing and a challenge for consumers. While it allows for a tailored approach to earning cashback, it can make the decision-making process more complex. In order to reduce this complexity, apply the KISS principle – or as it is better known, “Keep It Simple Stupid.” Weight your financial goals and spending habits to select the best for your situation.

Start with analyzing your typical spending patterns, honing in on the categories where you make the most significant purchases. A card with travel-related rewards might be ideal if you’re a frequent traveler. If you’re a food enthusiast who dines out often, a card with robust dining rewards is a smart choice. Moreover, consider the potential rewards you can earn with your everyday spending and any bonus cashback offers that may apply.

Furthermore, it’s essential to compare multiple cards’ cashback rates and terms. Look for any introductory offers that can boost your initial cashback earnings. There are pros and cons of cards with annual fees that will impact the card’s overall value.

Wrap Up

The diverse nature of cashback credit cards provide a dizzying array of options consumers must navigate to select the right card(s). Armed with the understanding that “cashback cards are not created equal,” you can make a well-informed decision that suits your financial needs and preferences. This will allow you to select the card best suited for your needs while maximizing your cashback rewards.

By using the factors discussed in this article to make your decision, you’ll select the card that provides the best fit based on your spending habits, offers competitive cashback rates, navigate introductory offers, annual rates and also provides the redemption options that align with your goals. With the right card, you will begin enjoying the benefits of cashback rewards catering to your unique lifestyle.

If you are in need of a cash back credit card or compare with your current card, take a look at the top cards of 2024 in this article from Forbes.


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