Cash Back Credit Cards: Pros, Cons and How to Choose One

A cash back credit card returns a percentage of your spending as a reward. Used carefully, it can save money. Used carelessly, it can cost far more than it gives back.

How cash back cards work

Each purchase earns a small percentage, and the total is credited to your account. Rewards may be redeemed as a statement credit, a deposit or a check, depending on the issuer.

Types of cash back cards

• Flat-rate cards: A single rate on every purchase, which is simple and predictable.
• Tiered cards: Higher rates in set categories such as groceries or gas, and lower rates elsewhere.
• Rotating category cards: Bonus categories change quarterly and often require activation.

The pros

• Rewards on spending you already do
• Consumer protections, such as dispute rights
• Simple redemption
• Possible sign-up bonuses after meeting a spending requirement

The cons

• Interest charges can wipe out rewards if you carry a balance
• Annual fees on some cards
• Spending caps on bonus categories
• The temptation to spend more

Compare the real cost

Check the annual percentage rate (APR), annual fee, foreign transaction fees and any late payment fees. If you will not pay your bill in full each month, the interest will usually outweigh the rewards.

How to choose

1. Look at your spending. Which categories account for most of your budget? 2. Match the card to your habits. A flat-rate card is easy if you do not want to track categories. 3. Check your credit profile. Better credit generally means access to more options. 4. Read the terms. Look at reward caps, expiration and how bonuses are earned. 5. Consider the fees. An annual fee should be less than the extra rewards you would realistically earn.

Sign-up bonuses

Bonuses can be valuable but only if you would meet the required spending naturally. Do not make purchases just to hit a threshold.

Good habits

• Pay the full statement balance every month
• Set up autopay for at least the minimum
• Track your rewards so they do not expire
• Review your statements for errors

Bottom line

A cash back card works best when you pay your balance in full. Choose one that fits your spending pattern, understand its costs and treat rewards as a bonus, not a reason to spend.

This article is for general information only and is not financial, legal or tax advice. See our Disclaimer.