When you’re comparing cash-back credit cards, picking the best card for you often comes down to the card’s rewards structure. Does it offer the same amount of cash back no matter what you buy? Or does it offer bigger cash bonuses on certain types of purchases?
Depending on your spending habits, the type of cash-back card you choose could have a big impact on how much you earn. If you’re the type of spender who uses the same one or two cards for everything, then you may not get as much value out of a card that rewards certain types of purchases more than others. On the other hand, if you’re a bargain hunter who loves getting a great deal, big cash-back potential may be just the motivation you need to grab a particular card from your wallet when you’re at the checkout.
Learning how cash-back cards work can help you optimize your spending and get more value out of your rewards cards. Here’s a closer look at the different types:
Tiered Cash-Back Cards
Tiered rewards cards are among the most common. With a tiered cash-back card, you’ll be offered a cash-back bonus of at least 2% to 3% on certain types of purchases. For example, a card might offer 3% cash back on gas and 2% cash back on groceries. Most tiered cards award at least 1% cash back on all other purchases.
Tiered cards are great for cardholders who predictably spend a lot on certain things. For example, if you eat out frequently or meet friends for happy hour every Friday, you could earn quite a bit using a card that awards 3% cash back on dining. Similarly, if you have a long commute to work, a cash-back card that offers a big bonus on gas could help whittle down your monthly gas bill.
The downside to tiered cards is that the earnings potential is maximized only if you remember to use your card each time you buy something that earns a larger bonus.
Many tiered cards also have limits on what you can earn in cash back—especially if there’s no annual fee. For instance, your tiered card may offer 3% cash back on gas purchases, but specify that the higher rate is only for the first $2,500 spent on gas in a quarter. If you spend more than $2,500, the rate drops to the 1% base level. So the maximum you’d earn at the higher rate is $75 a quarter.
Tiered cards are also more rigid than other types of cash-back cards. You may get less value out of tiered card if your spending is unpredictable or if your budget is relatively limited.
Some tiered cash-back cards let you pick the categories that earn a larger bonus. So if you’re having a hard time finding one that matches your spending, look for a card with customizable bonuses.
Flat-Rate Cash-Back Cards
Cards that offer the same amount of cash back on every purchase are often called flat-rate credit cards. These types of cards may offer cash back of 1.5%, 2% or maybe more. They typically allow you to earn unlimited cash back, rather than capping the total rewards you can earn in a quarter or year. So if you’re someone who charges just about everything you spend money on, this feature can be very lucrative.
Often touted for their simplicity, flat-rate credit cards are ideal for cardholders who don’t want to spend a lot of time thinking about rewards or want to use the same card for everything. All you have to do is use your card and you’ll be rewarded the same, predictable cash-back rate no matter what you buy.
Flat-rate cards make it easier to predict how much you’ll earn. For example, if you expect to charge $1,500 a month to a flat-rate card that earns 1.5% cash back, you can count on earning $270 by the end of the year. You may also earn more money using a flat-rate credit card if your spending tends to change dramatically every month or if you have a more restricted budget.
The downside to a flat-rate card is the rate. Most don’t award more than 2% cash back, whereas some tiered cards offer as much as 5% or 6% on some categories. If you spend a fair amount in a certain category, then you are leaving money on the table by not using a tiered card.
Flat-rate cards make great companion cards. If you already have a tiered rewards card, use a flat-rate card on all your miscellaneous expenses.
Rotating Bonus Cards
Sometimes called 5% cash-back cards, these types of cards offer a big cash bonus (usually 5%) on purchase categories that rotate every quarter. For example, one quarter you might earn 5% cash back on all of your department store purchases and in another quarter, your restaurant spending.
If you don’t mind tracking bonus categories that change every three months, you could earn significant cash back with this type of credit card. Your card issuer will likely give you a calendar for the rotating categories ahead of time and may even specify which merchants will earn you the higher rewards rate, like Amazon or Target. The categories can be very specific, rotating from fitness clubs and drugstores one quarter to airlines and car rentals the next.
One downside to cash-back cards with rotating bonuses is that they tend to be more work. For example, they often require you to “activate” the card’s new bonus category every quarter or forfeit earning a bonus. If you forget to check in regularly, you may not earn as much as you had hoped.
Cash-back cards with a rotating bonus, such as Discover it Cash Back, also tend to cap how much you can earn in a given period. So if you’re a heavy spender in a particular category, you may need to pair this kind of card with another type.
Plan ahead in order to maximize your earnings with a 5% cash-back card. For example, wait until there’s a bonus at Target to stock up on household supplies. Or, if you don’t think you’ll be able to spend enough in one quarter to max out a rewards category, buy gift cards you can use throughout the year.