A cash-back credit card is a great way to earn money back on the things you buy every day. But what does cash back mean? And how do cash-back credit cards work?
What are cash-back credit cards, and how do they work?
Cash-back cards are a popular way to earn rewards for spending money on your everyday purchases. The rewards can be in the form of cash which is typically given as a statement credit, points that you can use to redeem prizes or discounts, or both.
When you make a purchase with a cash-back credit card, the card issuer will usually set aside some percentage of the purchase amount as a "cash" bonus for you. This percentage varies from card to card and changes over time, but it's usually between 1 and 3 percent of the purchase price.
Five things you need to consider before selecting a cash-back credit card
1. What are the rewards that the card offers?
Cash-back credit cards are excellent tools for your financial plan, but they're only good if you get cash-back in categories you typically spend money. For example, a cash-back card that offers 5 percent cash back on gasoline purchases is an excellent choice if you're a heavy driver. However, if you're a restaurant patron, the best card for you might be one that offers 2 percent cash back on all your dining expenses.
2. What's the redemption process like?
Cash-back rewards are often worth something, but they're not always easy to use. Most cards give you points that can be redeemed for gift cards from major retailers or online merchants, but some also offer more specific redemption options such as airline miles or merchandise from specific vendors.
3. How much is the annual fee?
Annual fees are one of the most significant drawbacks of cash-back credit cards. They can really add up if you don't use the card enough to make up for the fee. Compare cards with different annual fees to see which one is the best deal for you.
4. What's the APR?
APRs (annual percentage rates) are a vital consideration when choosing a cash-back card. Higher APR rates mean that you'll have to pay more interest charges on your balance each month, so it's important to compare cards with similar APRs before deciding. Otherwise, you could end up in debt quickly and need to either consolidate credit card debt or work with a credit counselor to get your finances back on track.
5. Is there an introductory offer available?
Many cash-back credit cards offer introductory offers that allow you to get rewards benefits for a limited time without paying any fees or interest charges. Look for these offers when shopping around. They can sweeten the deal if you're considering signing up for a new card.
The bottom line
A cash-back credit card can help you save money on the things you buy every day. There are many great options available. So take these considerations into account to choose the right card for your needs.