Are cash-back credit cards “worth having or not”?
That’s the basic question arising out of our latest draw from the Reddit mailbag. Our inquirer today, let’s call him “Tim,” says he’s “considering applying for a cash-back credit card,” but hasn’t decided upon any particular card he wants, and in fact, isn’t 100% certain he wants a cash-back card at all.
It’s a common question, so let’s help Tim out by beginning with the basics before moving on to the decision-making.
What is a cash-back credit card?
A cash-back credit card is a credit card that counts up how much money you have charged to it, and pays you a percentage of that spending back in cash. Cash “rewards” can usually be redeemed in multiple ways, for example, as a “credit” on your account statement (reducing the size of your bill) or as a check for you to deposit, or as virtual money that you can spend to buy physical goods or services, or gift cards.
But basically, they’re giving you cash back, in one form or another.
How much cash? That depends, because different cards have different offers. In olden times, the standard rate of cashback was about 1% of your purchases (i.e. for every $1 you spent on your card, you’d get a penny back). As competition for card customers has increased, however, credit card companies have had to sweeten the pot significantly.
Today, I’d say about 1.5% is the standard cash-back offer, the de minimis below which you shouldn’t even bother applying for a cashback card. Many cards pay even more than 1.5%. For example Wells Fargo’s (NYSE: WFC) | WFC Price Prediction Active Cash, Citi’s Double Cash, Fidelity Awards, and SoFi’s (Nasdaq: SOFI) credit card all pay 2% (with some quirks related to exactly when and how you can claim your rewards). They also all charge no annual fee.
How to choose a cashback card
Which raises an important point. Cashback cards are really only “worth having” if they put more money in your pocket than they withdraw.
If you carry a balance on your card, for example, and are paying 20% interest on your debt, but getting only 1.5% or 2% cashback, it’s pretty obvious that you’re going to lose more money to interest payments than you gain from cash back” If this is the situation you’re in, forget about what specific kind of card to apply for. Pay off that debt first!
Likewise if you’re habitually late paying your credit card bill, late fees can eat up any cashback rewards you might be getting. Make sure you pay your bills on time, or no amount of cashback is going to help you.
And annual fees. Many cards charge fees for the privilege of using them. Some fees are small, $39 a year for example. Some are very large, ranging into the hundreds of dollars per year. If the amount of the fee you’re paying exceeds the amount of cash you’re getting back, you’re getting a bum deal.
The simplest solution (unless you actually enjoy pinching pennies and are skilled at working the system to get the best deal) is simply to ignore any cashback card offers that involve annual fees, and focus on those cards that don’t.
Picking a card for Tim
Circling back now to Tim and his particular situation, Tim says he “would mainly be using the card for things like utility bills, groceries and gas,” and he buys most of his groceries at Target (NYSE: TGT) and Walmart (NYSE: WMT). He “very rarely eat(s) out, (or goes) to the movies.” So basically, he’s looking for just “a recommendation for a good, all-around cash-back card,” and specifically, one that doesn’t limit cashback rewards for purchases at the big box stores.
This simplifies matters greatly.
Tim basically has two choices here. Either he can go for a card (like those noted above) that pays a generous 2% cashback on all his purchases (utilities, gas, and groceries included, and with no limits on purchases at Target and Walmart). Or he can get a bit more aggressive, and try to find a card that on average pays more than 2%.
How might Tim do that?
Many cashback cards take a low-high approach, offering for example a 1% minimum cashback on all purchases, but an above-average cashback rate on specific categories of spending. Capital One’s (NYSE: COF) Savor Card is a great example. Like its name implies, the Savor card’s rewards are skewed towards buying things you can eat, paying 3% cashback for grocery and restaurant purchases, but only 1% cashback for “everything else”. Other cards, such as the Chase Freedom card, pay cashback of 5% on categories of spending that change quarterly across the year.
Carrying multiple cards, and focusing your card usage, when spending on specific categories, on the cards that pay you the most in those categories, can easily lift you average cashback rate to 3% or better. It does take a bit of work, though, to get the balance just right, and you have to juggle more credit card bills this way.
If you, like Tim, are looking just for “a good, all-around cash-back card” that’s usable anywhere, just picking a 2% cashback card and being happy with good enough should do you just fine.
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