Personal Finance

How to Pick The Right Type of Cash Back Credit Card

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Cash-back credit cards are appealing simple in their rewards: You make purchases, and a certain percentage of what you’ve spent is rebated to you. The cards are free from the miles or points that complicate the rewards you earn with other card categories.

A little less simple is choosing among the three distinct flavors of cash-back cards. Here’s a breakdown of each, including their advantages and why you may want it (possibly in combination with one or both of the others) in your roster of credit cards.

1) Fixed-Rate Cash Back Cards: Perfect for Those Who Value Simplicity

These cards are the simplest type of this simplest of card categories. They offer a single cash-back rate, no matter where you shop or what you buy. These cards are perfect for credit card users who want a single cash-back card, and to skip thinking about which card to use for each specific transaction.

The downside to only sticking to one of these cards is that you’ll make less on some transactions than you might with other cards. Most fixed-rate cash back cards will give you 1.5% back on all your spending, plus some small sign-up bonus. A select few cards offer as much as 2% cash back, but these are few and far between.

That’s significantly less than what you can make with the other two flavors of cash-back card, at least on select transactions. However, the other two options will also require you to perform a little bit of extra leg work or thought to realize those maximum gains. If you’re unwilling or uninterested in doing so, you should focus your card search on fixed-rate cards alone.

2) Fixed-Category Cash Back Cards: For Those Who Want The Most From Frequent Purchases

Fixed-category credit cards are a type of fixed-rate cash back card. They are characterized by having an enticing rewards rate (anywhere between 2% to 4%) within a few shopping categories, and a paltry 1% back on everything else. These cards are specialized to the commodities that the average consumer buys the most – namely, gas and groceries.

Just about wherever you make these purchases, you’ll earn a cash reward. That distinguishes these category cards from branded cards issued by certain gas chains or grocery chains, whose rewards accumulate as points or freebies you can redeem only at that chain.

These cards are especially worthwhile if you drive a lot, or spend a lot on groceries, and at a range of different places.

3) Rotating Category Cash Back Cards: Good Secondary Cards For Meticulous Planners

Rotating-category cash back credit cards typically have the highest potential rewards per purchase. These cards commonly give their users up to 5% cash back on certain purchases.

There are a few catches, though. First, as the name of the type implies, the purchases for which these higher cash-back rates apply are limited and rotate, usually by quarter. For example, every year around December, these cards frequently boost the rewards rate on, say, purchases from department stores or – right on time for the gift-giving holidays. In addition, there’s a limit on the total purchases that can qualify for this elevated rate--typically, it’s $1,500 per quarter. And after those limits are reached, or the card rotates its category, and for all other purchases the cards offer a meager 1% cash-back.

To make the most of these cards, you also need to devote time and be organized. You must activate the bonus categories for each quarter and keep track of it as you spend. Each time you reach for your wallet, you need to know if you’re at a merchant where this type of card will benefit you the most. Individuals who are naturally meticulous and organized won’t find this to be problematic. Others, however, may find the extra hassle required is not worth the added rewards.

Mixing and Matching

Cash-back card consumers who want, above all, to keep it simple will likely want to choose a single fixed-rate cash card. Others willing to live with more complication in exchange for higher rewards should consider holding several of these card types.

Indeed, rotating-category cash back cards should almost always be paired with one of the other two card types we discussed in this article. In part, that’s because it’s unlikely that all of your purchases all of the time will align conveniently with the calendar of categories eligible for 5% discounts. And when they don’t, your card will earn a modest cash-back rate of 1%, which you should be able to beat with one of the other card types and should switch over to your backup card. And even in the rotating categories, you’ll benefit from switching cards once you reach the quarterly $1,500 cap. Once that happens, your rotating category card will once again only provide you with a measly 1% back for the remainder of the quarter – another perfect time to start using a card that’s more generous in that particular category, or for all purchases.

The article How to Pick The Right Type of Cash Back Credit Card originally appeared on ValuePenguin.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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