The idea of a credit card that gives you money for spending is pretty appealing, which goes a long way to explaining the enduring popularity of cash-back credit cards. The more you spend, the more you earn.
It’s a great sales pitch, but the details can be tricky, and you could wind up earning less than you expected — or canceling out your bonus altogether — if you don’t choose your card carefully.
“In general, we recommend that people stick to cards which have cash-back terms that are not overly complicated and don’t place limits on how much cash back they can earn,” says Erik Larson, founder and CEO of NextAdvisor.com.
Here are some tips from credit card experts on how to narrow down your options.
Find the best card you qualify for. While there’s nothing necessarily wrong with applying for a credit card with an application that was sent to you in the mail, the offers that come to you aren’t always as good as ones you could get if you go looking. Since card issuers are fighting for customers with top-notch credit, you’ll see a lot of credit card offers — not just cash-back ones — with triple-digit sign-up bonuses. The catch is that you need stellar credit — generally north of 750 — to land one of these.
Look out for spending thresholds — and slippery language. Fine print alert: The Advertising Self-Regulatory Council’s National Advertising Division recently recommended that Discover Financial Services LLC modify its claim that cardholders can earn “up to 1%” cash back in its advertisements. The Council says Discover needed to be clearer about the fact that cardholders have to spend $3,000 each year before they get 1% cash back, and that those first $3,000 earn a measly 0.25% reward rate. So if an offer says you can earn “up to” a certain percentage back in rewards, find out exactly what that means.
(MORE: The 7 Best Cash-Back Credit Cards)
Evaluate rotating bonus promos. In addition to a baseline rewards rate — generally 1% — most cards offer a higher cash-back percentage on a handful of categories that rotate on a quarterly basis. “Consumers should look for the card that rewards their spending habits,” says Matt Kane, general manager of Chase Freedom. Many cards today break down your spending by category, so look at one of your existing cards and see where most of your purchases fall. One catch is that enrollment usually isn’t automatic; you have to sign up for each promotion, so if you forget, you’ll lose out.
Tim Chen, founder and CEO of NerdWallet.com, recommends looking at the issuer’s merchant-funded rewards program to see if the retailers are ones you’d be buying from anyway. “These online storefronts can give you 2% to 20% extra cash back on select merchants,” he says.
Watch for spending caps. The caveat to those enhanced rewards is that most cards cap how much of your spending in that category can earn that higher rate, and the thresholds vary widely among issuers and promotions. For example, a bonus rate of 5% back on gas might seem like a great deal if you have a long commute, but if you only get that extra bump for up to $300 in spending, you’ll earn — at most — a less-than-impressive $15 over the course of that promotion.
Compare APRs. If you plan to revolve a balance, a cash-back card might not be the best choice; rewards cards in general charge higher interest rates than no-frills cards, and the cost of the interest will outweigh the value of your rewards. But if you’re determined to get a cash-back card anyway, shop around and compare the lowest purchase rates — not the promotional teaser rates, since you’ll presumably still have this card long after that rate expires.
Factor in fees. When you calculate how much you think you’ll be able to earn in rewards over the course of the year, subtract any annual fee the card carries. International travelers should also take into account whether or not the card charges foreign transaction fees, says Larson. Earning 2% back on overseas trips isn’t so hot if you’re paying 3% in foreign transaction costs.
Decide how you want to “cash in.” It sounds silly, but some cash-back cards don’t let you earn your rewards back as actual cash. Some issuers will mail you a check, let you apply the value to your next statement, or send you a gift card in the reward amount for a retailer of your choosing. But, says John Ulzheimer, president of consumer education for SmartCredit.com, ”some cash-back cards don’t give you the option of getting the cash back in the form of a check, and some just give the option of applying the cash back value as statement credit,” he says. “Point being, not all cash-back cards are created equal.”
Unfortunately, even some of the better cards out there do have complicated terms that can make it tricky to compare apples to apples. If you don’t want to crunch all the numbers yourself, Larson’s site offers a comparison calculator that lets you enter how much you spend per month in different categories and shows you how much you’d earn with different cards.