Are cash back credit cards worth it?

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Cash back credit cards are among the most popular rewards cards out there, and it’s easy to see why. These cards offer a simple way to earn rewards without the complications that come with points or miles.

But they aren’t right for everyone. Depending on your spending habits, you may get more bang for your buck with a different type of card. Plus, you’ll need to make sure you can pay your card off each month to avoid interest.

Here’s how to decide if a cash back card is worth it for you.

How cash back cards work

With a cash back credit card, for every dollar you spend, you'll get a certain percentage back as a cash reward. For example, if you spend $100 and your card offers 3% cash back, you’d earn $3 back on that purchase.

Many cash back cards have different reward structures. Some have flat-rate cash back on all purchases. Others have a tiered system, offering higher cash back rates for specific categories like groceries, gas, or dining.

Consider your own spending habits when deciding which type of cash back card is best for you. If you spend often at grocery stores or restaurants, a card offering more cash back for those purchases might make sense.

How you receive your cash back varies by card. Most cards let you receive your cash as a statement credit or direct deposit in your bank account. Some cards let you turn your cash back into gift cards, while others may even mail you a paper check.

Popular cash back cards

• The Wells Fargo Active Cash® Card offers unlimited 2% cash rewards on purchases. It allows you to redeem cash rewards as a statement credit, bank deposit, or for other rewards like travel or gift cards.
• The Chase Freedom Unlimited® offers a steady 1.5% cash back on all purchases, along with elevated cash back rates, including 5% cash back on Lyft purchases, 5% cash back on travel booked through Chase Ultimate Rewards, 3% cash back on dining, and 3% cash back on drugstore purchases.
• The Capital One SavorOne Cash Rewards Card is a good option for those who enjoy dining out and entertainment. This card offers unlimited 3% cash back on dining and entertainment purchases, 3% cash back at grocery stores, and 1% cash back on all other purchases.
• The Citi® Double Cash Card is a popular choice for individuals looking for straightforward cash back. You can earn cash back twice — 1% when you make purchases and an additional 1% when you pay off those purchases, offering a total of 2% cash back. There are no restrictive categories or rotating rewards to keep track of, making it easy to earn cash back on everything from groceries to bills.
• The Blue Cash Preferred® Card from American Express offers a whopping 6% cash back at U.S. supermarkets (up to $6,000 per year in purchases, then 1%), 6% cash back on select U.S. streaming services, 3% cash back at U.S. gas stations and on transit, and 1% cash back on other purchases. Although it comes with an annual fee, the generous cash back rates can easily offset that cost for frequent users.

Benefits of cash back credit cards

The main benefit of cash back credit cards is their simplicity. Rewards are straightforward and it’s easy to redeem your cash back. This simplicity can be appealing to individuals who prefer a hassle-free way to earn and redeem rewards.

Plus, the flexibility you get when redeeming your cash back allows you to use their rewards as you see fit, whether it's paying off your balance, covering everyday expenses, or saving towards your financial goals.

Most cards will also earn you some cash back with every purchase. Yes, you might earn more with some purchases, but it’s nice to know that every charge you make will boost your cash back rewards. This can really add up over time. For example, if your card earns 2% cash back on all purchases and you spend $4,000 each month, over the course of the year, you’ll earn $960 in cash back.

Cash back cards often have lower annual fees compared to premium rewards cards that offer travel perks or exclusive benefits. If you don't travel frequently or don't prioritize those additional perks, a cash back card can be a more cost-effective option.

Lastly, some cash back cards also have generous welcome offers, usually in the form of extra cash back if you spend enough with your card during the first three months of opening your account.

Just make sure you’re not overspending to reach the welcome bonus. For example, if you need to spend $3,000 to earn the welcome bonus but you can’t pay off that balance in full by your card’s due date, the interest you incur will more than outweigh the bonus you might earn.

Drawbacks of cash back cards

While cash back cards offer many positives, they have some drawbacks.

Cash back credit cards often have higher interest rates than other types of cards. Those high interest rates won’t matter if you always pay your balance in full by your due date. But if you tend to carry a balance and accrue interest charges, the interest rate can offset the value of the rewards.

While cash back rewards offer flexibility, they may have redemption limitations. Some cards only allow you to redeem cash back as a statement credit or direct deposit. This limits your ability to use rewards for other purposes like travel.

Cash back cards may also charge annual fees, especially those with higher cash back rates. If the annual fee outweighs the value of the rewards you anticipate earning, it may not be worth it.

The type of cash back card you get may come with its own restrictions as well.

If your spending habits don't align with the higher cash back rates the card offers, you may not maximize the rewards potential. For example, if a card offers higher rewards on groceries but you rarely spend much in that category, the value of the cash back rewards may not be worth it.

How do you know if a cash back card is right for you?

Is a cash back credit card right for you? If you want a rewards card with simplicity, the answer is probably yes. With a cash back card, you earn dollars on every purchase. And you can redeem those dollars in several ways. That’s as simple as it gets.

If you can pay off your card's balance in full each month, a cash back card can be beneficial as you'll be able to earn rewards on your spending.

It’s important to understand your monthly spending habits. If you spend a lot at certain types of businesses – such as gas stations, drugstores, or supermarkets – you should choose a card offering more cash back at the stores where you shop most often. If you spread your spending out evenly throughout the month? You can choose a card that provides a flat cash-back rate for every purchase you make.

Examine your ability to manage credit responsibly. If you have a history of carrying credit card balances and accruing interest charges, a cash back card may not be the best choice. The high interest rates on cash back cards can negate the value of the rewards.

Alternatives to cash back cards

If a cash back card isn’t right for you, there are alternatives.

• Travel rewards cards: These cards offer miles or points you can redeem for flights, hotel stays, car rentals, or other travel expenses.
• Points rewards cards: These rewards cards provide a flexible rewards system where you earn points on your purchases. You can redeem these points for various options, including travel, merchandise, gift cards, or even cash back. Points cards often offer more diverse redemption options compared to cash back cards.
• Co-branded cards: These cards are affiliated with specific brands, such as airlines, hotels, or retailers. They offer rewards specific to the brand, such as airline miles, hotel points, or discounts on brand-specific purchases.
• Balance transfer cards: If your primary focus is managing debt or reducing interest charges, a balance transfer card can be a good choice. These cards offer lower interest rates or promotional balance transfer offers, allowing you to save on interest and pay off your existing debt.

The bottom line

No one credit card is right for everybody. It’s important to look at your own spending habits and goals when deciding whether a cash back card is a good fit.

Frequent flyer? You might do better with a miles card that lets you turn rewards points into a free flight. But if you want to earn a bit of money back with every purchase you make? A cash back card is the better choice. 

[Disclaimer]: *Eligibility and Benefit level varies by Card. Terms, Conditions, and Limitations Apply. Please visit americanexpress.com/benefitsguide for more details. Underwritten by Amex Assurance Company

Editorial disclaimer: Opinions expressed are author's alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.