A majority of Americans — about 70 percent, according to CreditCards.com — have at least one credit card. Most millennials, in fact, have two credit cards to their name.
If you’re also packing plastic, one of those cards might offer a cash-back rewards program. Cash-back cards, as the name suggests, give you money back in exchange for your purchases.
So, how does cash back work on a credit card, and how do you choose the right cash-back card for your wallet? Before you pick one, make sure you understand these five things about cash-back credit cards.
1. They give back a percentage of what you spend
Cash-back credit cards work like a rebate; they pay you back a certain percentage of what you spend.
“Cash back is the simplest type of rewards there is,” said personal finance expert Sarah Hollenbeck. “The math behind it is so easy, in contrast to the more complicated points and miles cards out there.”
Let’s say you sign up for a credit card with a 1.5 percent cash-back rate, like the Capital One Quicksilver Cash Rewards card. For every dollar you spend, you’ll get $0.015 back. If you spend $1,000 with the card, $15 will go back in your pocket.
Now, this arrangement is obviously beneficial to the consumer. But how does cash back work for the credit card companies that offer it?
Credit card companies aren’t losing any money by offering cash back — they’re just sharing a fraction of the interchange, or processing fee, they charge merchants. When you charge $100 to your credit card at a store, for example, the merchant only gets $98 or so. The credit card takes the remaining $2 in fees.
Credit card companies share a portion of that interchange fee to attract and keep customers. They still make a profit, and you earn a small percentage back on your purchases.
2. Some rewards programs have rotating cash-back categories
Some cash-back credit cards offer a flat rewards rate on all your purchases. The Citi Double Cash card and Blispay Visa, for example, both offer 2 percent cash back on your purchases.
But other cards make things more complicated by offering multiple rates for different spending categories. The American Express Blue Cash Preferred card, for example, gives you 6 percent cash back on groceries and 3 percent on gas and select department stores. All other purchases have a rewards rate of 1 percent.
The Chase Freedom card, meanwhile, rotates its categories every quarter. Every few months, you’ll get 5 percent back in a new category, whether it’s restaurants, grocery stores, or gas stations. If you forget to activate the category, you’ll still get 1 percent back on all purchases across the board.
Note that some credit cards will set limitations in some categories. “Some cards let you earn extra cash back (5 or 6 percent) in certain categories, like groceries, but will cap the amount of cash back you can earn in those categories per quarter or year,” said Hollenbeck.
If you enjoy maximizing your rewards, you might benefit from a card with variable cash-back rates. But if you’d rather not worry about where you’re spending your money, a flat-rate rewards card could be the better fit.
3. You might have different options for redeeming points
How does cash back work when you’re ready to redeem your points?
“That’s easy, too,” said Hollenbeck. “Log in to your account. You’ll see how much cash back you’ve earned. It will be shown as a dollar amount. You can generally redeem all or some of it at a time, and, depending on the card, you have various ways of redeeming.”
Most companies offer one or more of these ways to cash out:
- Direct deposit into your bank account
- Mailing you a check with your cash-back rewards
- Applying the rewards to your current credit card balance
- Putting your points on a gift card from a popular vendor, such as Amazon
- Donating your rewards to a charity of your choice
Some cards require you to have a certain amount of points before you cash out. “Some cards will set minimum redemption amounts — you may have to wait until you have $20 in cash back accrued before you can redeem, for example,” warned Hollenbeck.
Before taking out a rewards credit card, do your research on how and when you’ll get cash back to make sure it’s useful to you.
4. Your APR might be high
Cash-back credit cards tend to be best for people who can pay their balance off in full each month. That way, you can reap the rewards without falling into high-interest credit card debt.
If you do carry credit card debt, a cash-back card might not be for you. Rewards cards typically come with high interest rates. The Citi Double Cash card, for instance, has a variable rate between 14.49% and 24.49%.
Cards with lower APRs typically don’t offer competitive rewards programs. When it comes to cash back or a low APR, you usually have to choose one or the other.
5. An annual fee might not be worth it
Getting money back on your purchases is a tempting offer, but it might not be enough to offset a high annual fee. The Amex Blue Cash Preferred card, for example, costs $95 per year. The Chase Sapphire Preferred costs $0 for the first year but $95 per year after that.
Although some cards lure you in with bonus offers in your first few months, the rewards might not be enough to justify the annual fee. When choosing a card, consider how much cash back you’ll get based on your spending habits.
If the rewards fall below the fee, a card with a lower annual fee — or no fee at all — might be a better match for your budget.
Make cash back work for you
If you’ve ever talked to friends and family about credit cards, you might have encountered a lot of strong opinions. Some people swear you need to avoid credit cards at all costs. Others rave about strategically using credit cards to earn lucrative rewards.
For most people, the best approach lies somewhere in the middle. Credit cards can be dangerous if you’re spending more than you can pay back each month. Cash-back cards tend to have high interest rates, so you should be wary of carrying a balance.
Plus, you don’t want to get tricked into spending more for the sake of earning points. A cash-back program should be a reward for your normal spending habits.
As long as you can exercise self-control in your spending, you could benefit from a cash-back credit card. That is, unless you’re more interested in earning travel points for your next vacation.
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.51% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|