Those who pay their credit card balances on time and in full each month should be using a rewards credit card. Although many cardholders enjoy their rewards in the form of loyalty points such as frequent flier miles, cash back remains the most popular type of rewards card.
Unfortunately, while cash back rewards can seem like a simple concept, there are dozens of cash back reward cards being offered by nearly every bank. Among all these cards are three basic types of cash back rewards.
Fixed Rate Cash Back Credit Cards
The simplest types of cash back credit cards are those that offer a fixed rate of return on all purchases. These cards typically offer between 1% and 2% cash back. Once cent per dollar spent is the most common rate of return, and it represents the minimum that any reward card holder should expect.
Tiered Rate Cash Back Credit Cards
The next type of cash back reward card offers a fixed rate on most purchases, with a higher rate on transactions at a particular category of merchant. For example, the American Express Blue Cash Everyday card offers 1% cash back on most purchases, with 2% being returned at gas stations and department stores, and 3% being returned at supermarkets.
The rates of returns are fixed, but in some cases, there can be limits to the amount of cash back earned at the promotional rates. For example, the American Express True Earnings card from Costco offers a 3% return on gasoline purchases, but only for the first $3,000 spent in a calendar year. However, there are no limits on the Blue Cash card, which is listed below.
5% Cash Back Credit Cards with Rotating 5% Bonus Categories
The final type of cash back rewards are those cards that offer increased levels of cash back for spending on merchant categories that regularly change. Cards that work this way include the Chase Freedom card, the Citi Dividend Card and the Discover More card. In each case, customers receive 5% cash back at varying retailers that tend to include gas stations, restaurants, travel or department stores.
The promotional categories last only three months, and there is typically a limit to the amount of spending that will qualify for the increased cash back. One of the key benefits many of the 5% cash back credit cards offer is a sign up bonus that can be as high as $200. Cash back cards with large sign up bonuses are listed below.
Which Type of Card is Best for You
Ultimately, the type of cash back credit card that is best for an individual largely depends on personal spending habits. Casual credit card users who only charge a few thousand dollars a year are likely best off grabbing a $100 or $200 bonus upfront, as it typically takes $10,000 to $20,000 of spending to earn the equivalent cash back off of everyday spending. Families are often best off with cards that offer higher rates of cash back on gas and groceries, as these two categories tend to represent the bulk of spending. Those who fall somewhere in between should opt for a cash back card that matches up with their current spending habits.
