Should You Have a Cash Back Card in Your Wallet?

by Megan Nye |October 1, 2018

If you love the concept of cash back — and, let's face it, who doesn't — you've probably considered applying for a cash back credit card.

Cash back credit cards are hardly a one-size-fits-all proposition: You'll want to be sure the card you ultimately apply for fits your lifestyle and personal financial habits. This guide can help you make an informed selection before you apply.

How do cash back credit cards work?

A cash back credit card is one of the most popular types of rewards credit cards available. When you make qualifying purchases with your cash back credit card, you accumulate cash rewards.

Certain cash back cards offer flat-rate rewards, meaning the percentage of cash back you accrue is consistent for every purchase you make with them.

Tiered rewards cards typically offer elevated cash back rates for select spending categories, such as groceries, gas and travel, or for spending at specific retailers, along with a baseline flat-rate rewards system for other spending categories.

Some cards may also include rotating bonus categories, offering accelerated cash back for select categories. However, the categories tend to change and are offered on a limited rotating basis. Also note that cardmembers may have to enroll to take advantage of these programs. So, you may earn extra rewards for dining out in the summer, but more on department store spending during the holidays.

Cash back vs. other rewards credit cards

Of course, cash back cards aren’t the only rewards game in town — and it can pay to understand the alternatives.

You can earn and redeem accumulated points or miles toward things like airline tickets and hotel stays.

1. Travel rewards credit cards

With a travel rewards credit card, you can earn and redeem accumulated points or miles toward things like airline tickets and hotel stays. These cards may offer valuable perks such as airport lounge access, savings on in-flight dining, free baggage check and other unique travel benefits. Plus, a travel rewards card may offer a flat-rate or tiered rewards program structure based on select spending categories.

2. Closed-loop store cards

While ringing up a purchase, you’ve probably been asked if you’d like to apply for a store credit card. If it is a “closed-loop” card, you’ll find it will work only in the retailer’s physical and online stores. In lieu of cash back, the rewards you earn for your purchases generally come in the form of non-transferable savings coupons for that retailer.

3. Open-loop store cards

Issued by credit card companies, open-loop store cards allow you to swipe your plastic beyond the featured retailer, anywhere that brand of credit card is accepted. You may even earn rewards on purchases outside the doors of your retailer. As with closed-loop store cards, you’re likely to receive rewards in the form of an in-store savings coupon.

Is a cash back credit card the right choice for you?

Before you start applying for a card, here are some important questions to consider:

Can you handle a cash back credit card without overspending? Janet Alvarez, executive editor at Wise Bread, doesn’t recommend this card type if you worry you’ll overspend in an effort to reap rewards. You’ll also need to spend time tracking and redeeming for cash back, signing up for category bonuses where applicable, and keeping up on various rewards policies if you carry multiple cash-back cards.

How’s your credit history? Before you begin applying for cash back credit cards, check out your own credit score and review your credit history. Great card offers may be available based on credit score and other factors. There are steps you can take to help improve your score.

What’s the annual fee? A rewards credit card may or may not come with an annual fee. When considering if a card is right for you, look at the benefits and rewards it has to offer, and whether there are any additional fees or costs associated with the card.

What’s the card’s interest rate? Some rewards cards come with high interest rates. If you plan to carry a balance, the interest you pay may quickly negate the benefit of any rewards you reap. If you think you may not be paying off your balance owed each month, a low-interest card — even without rewards — could be a better bet. Also, be mindful that some cards offer a 0% APR for a limited time but switch over to a higher rate later, so pay attention to the terms and conditions.

Does the rewards system suit you? A card’s particular rewards structure is key to determining whether that card aligns well with your spending habits. Before you apply, understand when or if the rewards categories will change. If you prefer a “set it and forget it” approach, tread carefully on rotating and tiered rewards offers.

What’s the fine print? Be sure to read and understand a rewards card’s terms and conditions and the details of its rewards program. Some cash back rewards may limit the amount of cash back you can earn per quarter, Alvarez says. Other cards may require you to spend a certain amount. Remember: You won’t be able to enjoy rotating cash-back categories if you forget to sign up for rewards each quarter.

Are there limitations on how you can claim your cash back? Be aware of the redemption options available to you. Some cards allow you to redeem cash back rewards of any amount while others will permit redemption only in certain dollar-amount increments, such as $25. Which means you may have to wait to redeem your cash back until you’ve earned the required amount.

When considering if a card is right for you, look at the benefits and rewards it has to offer.

Amp up your rewards

To maximize the benefits of your cash back credit card, follow these rules:

  • If you carry multiple cards, always use the card that maximizes the benefit of a given transaction. If you can earn 2% cash back with Card A but 5% cash back with Card B this quarter, take advantage of the extra rewards.
  • Carrying a card with rotating rewards categories? If so, make a note every quarter to sign up for those rewards. And don’t forget to redeem your earnings on all your rewards cards on a regular basis.
  • Don’t spend just to earn rewards. Whatever joy earning rewards brings may not outweigh the discomfort you feel after overextending yourself.

If you carry multiple cards, always use the card that maximizes the benefit of a given transaction.

Whatever decision you make about rewards cards today, be sure to revisit it from time to time in the future — the card you’re loving now might not be your best option down the road. New cards on the market, a better credit score or a change in your spending habits could mean that a different card would be an even better, more rewarding fit.


Megan Nye

is a personal finance freelance writer. Her writing has been published by Business Insider, Credit Karma, Lending Tree, U.S. News & World Report, Personal Capital and Northwestern Mutual.

The content reflects the view of the author of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.