Out of all the rewards programs that banks offer on credit cards, this is hands down the simplest one to understand.
There are 2 main types; 1) Flat rate cashback and; 2) Bonus categories. Here’s how it works; flat rate Cashback (For Example, Wells Fargo Cash Wise of Capital One Quicksilver) both offer you 1.5% reward in the form of a cash credit for everything you spend on the card, no exceptions, no caps. So when I buy dinner for my friend and I, I receive $1.50 back. Doesn’t sound exciting right? Think again! Now I pay for my rent on that card which is $2,200 every month or $26,400. Ouch! But here’s the nice part, I get $396 back. It’s not going to change the world, but hey, I’ll take it!
Now here’s where it gets really interesting, certain cards offer bonus categories, these are so insanely lucrative that the banks have to cap it, otherwise we’d all go nuts. A great example is the Discover It card, one of my personal favorites. Yes, I have a lot of cards! More about that later… So here’s the deal, each calendar quarter, Discover gives a new bonus category. For the 4th quarter of the calendar quarter (October, November and December), the 5% Cashback bonus categories are Amazon.com and Target. I’m sorry, can you say “amazing!!”. This offer is so lucrative that they cap it at $1,500 spend. So if you spend that $1,500 over those 3 months, you get $75 back just for using your Discover card. In this instance, if you used your Wells Fargo card, you would only get 1.5% cashback or $22.50. So what’s the catch? Well, if you use the Discover card for non-bonus categories, you only get 1% cashback as opposed to the 1.5% that Wells Fargo offers on everything. Different cards have different bonuses, best to see which bonus categories match your regular spending patterns.
Pros & Cons of Cash Back Credit Cards
As we look at Cashback credit cards, we found a lot of small differences between the cards and these small differences can be the difference between receiving $360 cash back or receiving $840 cash back per year (based on $2,000 monthly spend).
So what’s the difference? It’s pretty simple, there are 3 main things we look at; 1) What you spend your money on and; 2) How much effort you want to put in to maximizing the rewards; 3) Where your credit profile ranks.
If you are like me, you won’t mind having more than 1 card in your wallet to maximize specific category bonus rewards, more about this later. But if you want to keep it simple and just have 1 card, then either a flat rate cash back card or 1 card that suits your spending behavior for you are the best. I’ll break it down below to make it easy for you to decide which suits you best
Now for the Pros:
With cashback cards, compared to miles or points based rewards, you have a simple, easy to understand way of getting rewarded for your cards. You don’t have to do anything, transfer miles, deal with blackout dates. It’s really simple, spend money, get rewarded with cash credited to your account that you can do with as you please. Meaning, you can use it to pay your bill or you can have a check sent to you to deposit into your checking or savings account.
One thing I personally love is that with this cash back, if I just ignore it till the end of the year, I have a nice little savings account that I did nothing for. I can now go buy one awesome thing which for last year was a new laptop, yes, I’m typing on it right now!
What makes cashback cards great is that there are typically no exclusions, though some have limits on bonus categories. It means that I can charge anything possible to my card and get rewards for that spend. I personally pay anything and everything to my credit card, so when I pay my water bill, electrical, rent car insurance, I actually get cashback from my card. Hey, I was going to spend that money anyway so if the bank wants to give me free money for using their card, I’ll take it.
So what’s the Catch:
Seems in life there is always a catch. It can be a little confusing and overwhelming of which card to choose. Not to worry, we are here to help. There is no 1 size fits all card and for me, a cash back card is great, but I don’t use it for everything. It’s true that cash is king and cashback cards are great, but you have to know how to use them. If you want to keep it super simple and if you are going to choose just 1, then I would suggest a flat rate card.
If you are like me and love to maximize the rewards and cash back, then here is how I arm this side my wallet; I have 2 flat rate cashback cards (love those sign up bonuses. I received $150 from Capital One and $200 from Wells Fargo) and 1 card that has bonus categories (Discover I).
Cashback Vs Rewards Cards, the great debate
When comparing a cash back rewards card to a travel rewards card with the bonuses they offer, it is somewhat limiting. Sure, it’s great to receive straight cash, but if you are like me and want to use credit card rewards for traveling, then cashback cards aren’t ideal. Travel rewards cards actually offer higher value per dollar spend then a cashback rewards card, they just have the limitation of where they can be used. For example, if you get a Starwood Preferred Guest Credit Card from American Express, you can only use those points at Starwood Hotels. Now that’s great if you stay at Starwood Hotels and if you do, I would definitely recommend this card. And here lies the difference, these points are worth more at a Starwood Hotel then to use the same cashback credit. In fact, these points are usually worth 50% to 500% more than cash rewards depending on what you spend them on (5 Starpoints per dollar spent at participating SPG locations, 2 Starpoints per dollar at Marriott Rewards Properties and 1 Starpoint per dollar on all other purchases. That adds up quickly! This is compounded when you take into account the signup bonuses that are offered when you sign up to travel rewards cards. Starwood is currently offering 25,000 Starpoints after you spend $3,000 in purchases (not balance transfers) in the first 3 months. QUICK TIP: I may be known to use this card just for my hotel reservations to get 5x points for every dollar spent!! Another example of why I believe in multiple cards, maximize those rewards!