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How to Choose a Cash Back Credit Card
Cash back credit cards can be very popular with consumers, largely because of their simplicity and flexibility. For many consumers, the concept of cash back rewards has a universal appeal.
It's easy to understand what benefits are gained: cash back every time you make an eligible purchase. Even though the reward is clear enough, there are many differences between the various cash back cards on the market. Let's take an in-depth look at how to choose a cash back credit card.
What is a cash back credit card?
A cash back credit card is a rewards card that gives you back a percentage of the money spent on qualified purchases. Customers typically earn cash back rewards as points or miles, depending on the type of credit card they have. They can then redeem those points or miles for statement credits for their credit card, direct deposit those points as deposits in a deposit account, or redeem for merchandise among other options.
How does a cash back credit card work?
Each time you use your cash back reward card on an eligible purchase, you earn a percentage of your purchase amount as cash back points. For example, if you buy $300 in eligible purchases with a 2% unlimited cash back card, your next statement would show $6 in cash back rewards.
Some cards reward a fixed percentage on all purchases. Other cards, sometimes called tier-rate cards, may offer higher percentages for specific categories. For example, you might get a certain percentage on gasoline and groceries and a lower percentage on all other eligible purchases.
When you make eligible purchases, your cash back rewards are calculated during a monthly billing cycle and placed on your monthly statement. Credit card issuers typically offer different ways to redeem them, including direct deposit into a bank account, a statement credit that can be applied to your balance, and redemption for online shopping and gift cards.
What should I consider when choosing a cash back credit card?
There are a lot of different kinds of cash back credit cards, and many factors to consider when you decide to apply for one. The starting points for your assessment are your spending habits and the way you plan to use the card.
When you compare cash back credit cards, consider these topics before making a decision:
Rewards and rates
Rewards on cash back cards may seem straightforward, but there are other factors at work. As we mentioned earlier, some cards pay you a fixed percentage and others set higher percentages for certain spending categories. Others set higher percentages if you buy from a certain merchant or online retailer.
Some cards rotate the spending categories every quarter, while others allow you to pick the spending category that provides the highest percentage.
However, some transactions might not qualify, including balance transfers, cash advances, money orders, and lottery tickets and other gambling transactions.
Sign-up bonuses
Some cash back rewards credit cards also come with special introductory rates, often called sign-up bonuses, but there may be conditions. For example, you might have to charge a certain amount on your card within a limited time to get the reward. You'll have to decide if an introductory rate is something you could take advantage of and then compare introductory offers from different card issuers.
Annual fees
Certain cash back rewards cards charge annual fees, but others don't.
A no annual fee cash back credit card provides access to rewards without the expense of a recurring fee. Cards that charge annual fees may offer higher rewards rates or extra perks.
It's up to you to decide whether the benefits outweigh the cost of that fee.
Redemption options
It's important to make sure that the redemption options for a cash back rewards card suit your needs. Typical cash back redemption options include direct deposits to bank accounts and statement credits, but there are other possibilities.
Points might also be used to buy gift cards and make other purchases through the credit card issuers online portal and other locations.
Spending habits
Look at your spending habits before deciding on a specific card. If you don't use your credit cards much, paying an annual fee for extra benefits might not be beneficial. If you use a card for your business, perhaps a flat-rate cash back reward with no caps or limits is for you. Other spending habits can greatly influence what type of rewards you might like. Read the "Lifestyle" section below for even more options.
Perks
Cash back cards can offer a wide variety of incentives, but you'll have to look carefully to see which perks would suit you best. Travelers might benefit from a card that includes rental car insurance coverage and roadside assistance. Business owners might appreciate the option of small business or commercial purpose credit cards that allow adding employee cards with spending limits at no additional cost. For people who like to go out on the town, access to exclusive events, special venues, or early ticket sales can be attractive perks.
Protections
Some rewards cards come with built-in protections, such as extended warranties and cell phone protection. Fraud protection and identity theft coverage can be other welcome benefits. Cards with purchase security programs might replace, repair, or reimburse the cardholder in cases of damage or theft.
Lifestyle
Your lifestyle can be a key factor when choosing what type of card might work for you. Here's some cash back card categories for you to consider:
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Card for groceries. If you tend to spend a lot on groceries every month, consider a card that gives extra rewards at grocery stores
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Card for dining and entertainment. If you eat out a lot, or attend shows, concerts, movies, or amusement parks, look for a card that offers higher cash back percentages for purchases in those categories. Some rewards cards also add various entertainment discounts, free tickets, or ticket presale opportunities
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Card for gas. Some cards will give a higher percentage of cash back for gas purchases than other types of transactions. If you drive long distances, take frequent trips, or often fuel multiple vehicles, a gas rewards card might be for you. Rewards cards offering rotating categories may let you assign a boosted reward percentage for gas station purchases over other categories, then change the category to something else later
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Card for travelers. Some cash back cards put a higher percentage on travel expenses or allow you to choose it as your favored spending category. These credit cards might also come with valuable perks, like concierge service, roadside service, luggage insurance and car rental benefits
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Card for students. Many students haven't had time to establish good credit or any credit history. This can make it difficult to get a loan, credit card, or even an apartment. However, some cash back rewards cards are designed to help people build a good credit history
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Cards with no annual fee. Don't assume that you'll have to get a credit card with an annual fee to enjoy cash back rewards. There are many cash back cards that do not charge annual fees
How to compare cash back rewards cards
Keeping all the above points in mind, let's review a checklist for comparing cards:
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Consider spending categories. Make a list of what categories you spend the most on like groceries, gas, travel, and dining. This will help you decide between a flat-rate rewards card, which gives back the same percentage for all eligible purchases, or a category rewards card that gives back a higher percentage for some spending categories and a lower rate for others
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Calculate potential rewards. Estimate your annual spending in reward-earning categories. The previous year's bank and credit card statements can help you with this exercise. Then, multiply your estimated spending by the cash back reward percentage or percentages. You should also consider cash back limits because your card issuer might put a cap on the amount of cash back you can receive each year
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Compare against fees. If annual fees, foreign transaction fees, or other fees are included in a cash back reward card, you'll need to consider those as well
It also might be helpful to create a chart that'll make it easier for you to compare the figures for each card you're considering
FAQs
It really depends on your lifestyle. Cash back credit cards can allow you to earn a percentage cash back on everyday purchases, sometimes at varying rates. An airline partnership credit card may be valuable for you if you travel frequently with that airline and it provides you with a miles earn for that airline.
It depends on the card issuer. Your points might not expire if the account continues to stay open and is in good standing. However, if you or the card issuer closes the account, you might lose your rewards.
A new application could trigger a "hard inquiry" on a credit report with many different types of cards, but not specifically because it's a cash back card. The inquiry may temporarily lower credit scores by a few points, but over time, responsible use of a rewards credit card could result in a higher credit score.
Credit Cards offered at TD Bank
Explore TD Bank credit cards to find the right offer for you and your financial goals.