Pros and cons of cash back credit cards

Cash back credit cards may be a powerful financial tool in your wallet. Earning cash back for your spending and paying bills is more than just an enticing feature. Like any other card on the market, there are pros and cons of cash back credit cards to consider before you apply for one.

How do cash back credit cards work?

These cards pay back a certain percentage of what you spend, usually in the form of points. Every time you use your card for an eligible purchase (defined by the credit card issuer), you receive a percentage of your purchase price back at the end of the billing cycle or statement period. For example, if your cash back credit card has a 1.5% cash back rate, you'll earn 1.5 cents for every dollar you spend.

Types of cash back credit cards

There are three major categories of cash back credit cards:

• Fixed
• Tiered
• Rotating

Fixed

With this cash back card, you earn a fixed rate of cash back on every eligible purchase. That might make this the easiest cash back card to use because you probably won't be worrying about which card to use or where. Your rewards rate will still depend on your card.

Tiered

This type of cash back credit card offers cash back on certain categories. They may also be called your “bonus" categories.

Common categories include dining, gas stations, grocery stores and travel. With tiered bonus categories, you may earn more cash back on specific types of purchases, as they offer higher cash back rates. Each card offers its own set of categories that earn cash back at higher rates, so you'll want to pick the card that best fits your spending habits.

You may earn more cash back with a tiered cash back card than you would with some fixed-rate cards. As a result, you'll have to know where to use your card to earn the most rewards. Besides the higher rates in specific categories, you usually earn a fixed cash back rate on all other purchases.

Rotating

Another popular type of cash back rewards card comes in the form of rotating categories. This is like a tiered card because you earn cash back when you activate and spend in certain categories. However, the categories generally change every month or few months, so you might need to activate categories when they change, then use your card accordingly.

You'll want to be aware of which retailers and categories are eligible for cash back rewards on a given promotional cycle. The credit card issuer may rotate eligible categories and require you to activate the cash back participation feature on your account each month of a quarter. While this type of card may sound complicated or unpredictable, it has the potential to reward you with the most cash back for your spending.

Cash back categories

Cash back reward programs are typically flexible and allow you to earn a percentage of money back from everyday spending, travel and shopping through participating retailers. There may also be limitations, exclusions and rules you have to follow if you expect to maximize your points.

Here are some common cash back categories:

• Grocery stores
• Gas stations
• Restaurants
• Travel
• Drugstores

Redeeming cash back rewards

The rewards you earn are stored on your account until you choose to redeem them. Cash back credit card rewards can be paid out in dollars or points.

If you redeem for dollars, your rewards can usually be delivered in two forms: direct deposit to a bank account or as a credit on your monthly credit card statement, known as a statement credit. When you redeem for points, they may hold more value than cash, depending on the issuer's relationships with specific merchants.

With Chase credit cards, your points don't expire as long as your account is open. If your account is closed for program misuse, fraudulent activities, failure to pay, bankruptcy or other reasons, you'll immediately lose all your points.

Cash back credit card benefits and drawbacks

Before you submit any applications, consider these pros and cons of cash back credit cards.

Pros

• May have a low annual fee: You may only pay an annual fee once a year around your account anniversary. The fee may be worthwhile based on the cash back you earn.
• Intro APRs: Cash back cards tend to offer an intro APR on purchases for a limited time. Although the time period ranges, this may help you pay down big purchases or existing debt.
• Sign-up bonuses: The primary appeal of a cash back credit card is the cash back reward, and sign-up bonuses usually award cash back. However, you'll have to meet a minimum spending requirement within a certain period. When you do, the sign-up bonus you get may be a great start to your cash back earnings.

Cons

• Specific benefits: Cash back credit card benefits focus on cash back. If you're looking for additional benefits, such as free hotel stays or reimbursements on certain services, another type of rewards credit card may be more suitable.
• Little redemption variety: Cash back is the primary redemption option for most cash back credit cards. If you're looking to put your rewards towards travel-related expenses, a travel rewards card may be a better choice.
• Standard APR: The APR you have to pay after any promotional and intro APRs expire depends on your creditworthiness. If you don't have great credit, you may receive a high APR on your cash back credit card.

Final considerations

Is a cash back credit card right for you? When you answer, be realistic about how valuable and useful this type of credit card reward is to you. Also ask yourself:

• Is cash back a valuable reward for me?
• Are the rewards worth the annual fee?
• Is there a sign-up or new cardmember bonus?

To many consumers, cash back probably sounds appealing. Before applying, however, you'll want know exactly how your spending will earn you rewards. Weigh the potential earnings against costs like the annual fee and interest charges, too. With enough research, and perhaps some help from our Card Comparison Tool, you may find the next credit card for you in no time.