Cash back credit cards reward you for every purchase you make with money back in your pocket. That’s like getting a discount everywhere you go.
But before you dive into an application, find out how to get the most from your cash back credit card.
[Read: Best Cash Back Credit Cards.]
What Is a Cash Back Credit Card?
A cash back credit card is a type of rewards card that earns back a percentage of what you spend on it.
Generally, you’ll earn at least 1% cash back on every purchase with a basic cash back card. If you spend $100, you will get $1 back. That doesn’t sound like much, but it adds up.
“There are excellent ways to make your spending work for you in a time when the cost of goods and services has risen,” says Jeff Richardson, senior vice president of marketing and communications at VantageScore Solutions. “Getting some cash back is very beneficial, as it can make your money go a little bit further than it would otherwise.”
You can earn cash back in dollars or points, and common ways to redeem it are for statement credits, checks or direct deposits, or gift cards.
Some cash back credit cards earn bonus rewards for spending in certain categories, such as gas stations or grocery stores. Other cards may offer quarterly rotating bonus categories, but issuers may limit your earnings.
Also, you’ll only earn cash back on qualifying transactions. Transactions such as balance transfers, cash advances and money orders won’t earn cash back.
Types of Cash Back Credit Cards
Generally, you will find three types of cash back credit cards: flat rate, tiered and rotating category:
— Flat rate. With a flat-rate cash back card, you will receive the same cash back percentage on every purchase. For example, a card that earns a flat 2% cash back offers that fixed amount back on all spending. You can typically earn unlimited rewards at the flat cash back rate.
— Tiered. A tiered card earns cash back at higher rates in certain spending categories and usually 1% back on everything else. For example, you might get 3% back on gas or 6% on groceries. You may be limited in how much you can earn at the bonus rate, such as up to $6,000 annually.
— Rotating category. These cards have bonus categories that change each month or quarter, generally earning a much higher rate than other purchases, but the categories require activation. You might get 5% cash back on up to $1,500 in Amazon purchases for one quarter and then switch to grocery purchases the next quarter. Like tiered cards, rotating bonus category credit cards generally earn an unlimited flat rate of about 1% that kicks in for purchases that don’t qualify for quarterly bonus earnings.
How to Maximize Cash Back Rewards
Maximizing your cash back rewards is all about knowing your spending habits and using a card or portfolio of cards that offers the best rewards in the categories where you tend to spend the most. You can plan to direct your spending to credit cards with the best rewards value for each purchase.
If gas and groceries are major expenses in your household, choose a credit card that earns bonus cash back on those purchases. Or you might look for a card that offers bonus cash back on dining, travel or entertainment if you frequently spend a lot on those purchases.
For cards with quarterly rotating bonus categories, you will need to remember to activate the categories to earn at the bonus rate. You can make this routine by doing it when you log in to your online account to pay your bill. Then, you can direct any planned spending in those categories to that card.
Chip Chinery of Chip’s Money Tips, a personal finance blog and podcast, says he plans for when his card rotates to Amazon as a 5% cash back bonus category. He loads an Amazon gift card with $1,500 — the quarterly bonus limit — and gets $75 back for his credit card spending.
You might also want to time your spending to rotating bonus categories. For example, you might decide to pay for an annual subscription with a card that earns 5% on streaming services one quarter.
Tools to Help Maximize Cash Back Rewards
You may not easily remember which card in your wallet will earn the most for the purchase you’re about to make, especially when categories rotate every few months. That’s where credit card rewards tracking apps come in.
If you’re juggling a portfolio of cards, apps such as MaxRewards or Uthrive can help you decide which card to use and when.
[Read: Best Rewards Credit Cards.]
How to Redeem Cash Back on Credit Cards
You can usually redeem cash back as dollars once you’ve reached a threshold, usually about $25. Some cards will allow you to redeem cash back in any amount, however.
When you redeem cash back, you typically have the option to get a credit on your monthly statement, a deposit to your bank account, or a check in the mail. You may be able schedule automatic cash back redemption, which you can set to monthly or a specified amount.
Some credit cards earn cash back that you can redeem as rewards points. You can redeem points through the credit card issuer’s rewards portal, which may offer a higher or lower value than you’d get for redeeming the points as cash back. Options for redeeming points typically include travel purchases, statement credits and gift cards.
Cash back generally offers a higher redemption value than other options, such as purchasing gift cards or paying with points at checkout. However, you might get more value from your rewards points by redeeming them for travel through the issuer’s portal or by transferring points to a travel partner.
Some cash back cards offer additional redemption options, such as donating your cash back to charity, redeeming cash back to an investment account, or using cash back to make loan payments.
[Read: Best 0% APR Credit Cards.]
How to Choose a Cash Back Credit Card
Before you sign up for a cash back credit card, ask yourself the following questions to determine which one is right for you:
— How’s your credit? Your credit score and history will influence which cash back credit cards you are offered. Some of the best cash back cards are reserved for consumers with excellent credit, but you may still qualify for a cash back card even if your credit isn’t perfect. You’ll want to apply for cash back cards that accept customers with your credit profile.
— Do you prefer flat-rate, tiered or rotating bonus category cards? You might prefer a flat-rate cash back card if you don’t want to spend time chasing bonus cash back categories. “Keep it simple,” Chinery says. “If you just want some cash back and you’re just starting out, get a 2% cash back card with no annual fee.” Another option is to use a mix of tiered and flat-rate cash back cards.
— What do you spend the most money on? As you consider cash back cards, compare bonus categories. Whether year-round or quarterly, the bonus categories should align with your spending habits to earn the most cash back.
— Can you earn a sign-up bonus? You could earn additional cash back when you meet the minimum spending requirement for a new card. Compare sign-up bonuses among cards, as these offers can vary widely.
— What are the fees? If the card charges an annual fee — you’ll find ones that don’t — make sure the rewards and benefits are valuable enough to offset it. Also, look at late fees, foreign transaction fees and other card fees.
— Do you plan to carry a balance? Carrying a balance on credit cards is generally not a good idea. Even though you’ll earn rewards on a cash back card, those rewards can’t offset the interest you’ll pay. If you need to carry a balance, consider a 0% introductory rate card — some of which offer cash back.
“As long as you pay your card off in full every month, it can be very lucrative to use a cash back card,” Chinery says. “That small cash back percentage can add up to hundreds of dollars a year.”
More from U.S. News
Are Credit Card Rewards Taxable?
My Credit Card Rewards Got Me These Amazing Experiences
7 Stress-Free Ways to Maximize Credit Card Rewards
How Do Cash Back Credit Cards Work? originally appeared on usnews.com
