Cash back credit cards let you earn money back on your purchases. Whether a cash back credit card is worth it depends on your spending habits, financial goals and ability to manage credit responsibly. Read on to learn more about cash back credit cards, their benefits and potential drawbacks.
How do cash back credit cards work?
Cash back credit cardholders earn a percentage of their spending back as cash rewards. Depending on the card, this could be a flat rate on all purchases, higher rates in specific merchant categories (e.g., grocery stores, gas stations) or rotating bonus categories that change periodically (e.g., quarterly). For example, a card offering 2% cash back on every purchase provides $2 for every $100 spent. Or a card might offer 5% back on grocery store purchases, which means you’ll earn $5 for every $100 spent on groceries. Cash back can often be redeemed for a statement credit, direct deposit, check or gift cards.
Benefits and drawbacks of cash back credit cards
Whether a cash back card is worth it depends on how you use it. Here are the key factors to consider:
Benefits of cash back credit cards
- Often has a simple rewards structure: Cash back rewards cards are typically straightforward, making them appealing for cardholders who want easy-to-understand benefits.
- Flexibility: You may be able to redeem your cash back in a few different ways, including for a statement credit, direct deposit, check or even gift cards.
- No additional cost (when used responsibly): Many cash back cards may come with no annual fee, allowing cardholders to earn money back without added costs.
Potential drawbacks of cash back credit cards
- Interest charges: Carrying a balance on any credit card can lead to interest charges, which can quickly offset any cash back earned. To avoid interest charges, pay your balance in full by the payment due date each month.
- Spending temptation: The promise of rewards can encourage overspending, leading to financial strain if not managed carefully.
- Category caps: Some cards impose limits on how much cash back you can earn in certain merchant categories. Be sure to review the card’s terms for any limitations.
- Annual fees: While many cash back cards may have no annual fee, some cash back cards may charge one. Ensure the cash rewards you earn justify the cost of the annual fee.
When is a cash back credit card worth it?
Cash back credit cards can be worth it if:
- You can pay your balance in full by the due date each month to help avoid interest charges.
- Your spending aligns with the card’s cash back structure, allowing you to earn more. For example, a no-annual-fee card with a flat 2% cash back rate may be ideal for someone who spends consistently across multiple categories. Alternatively, a card that offers more cash back on eligible travel purchases can make sense for someone who spends a lot in that category.
- You choose a card with benefits that fit your financial habits.
Tips for using a cash back credit card
- Choose the right card: Look for a card that matches your spending patterns. If you spend heavily in specific categories, consider a card that lets you earn more in those categories.
- Take advantage of welcome offers: Some cash back cards let new cardholders earn more cash back if they meet certain spending requirements within the first few months.
- Track category spending: This can help you earn more if your card has rotating bonus categories or category maximums.
Final thoughts on cash back credit cards
For many consumers, cash back credit cards can offer great benefits. However, whether they’re worth it depends on responsible usage and whether the card aligns with your spending habits and financial goals. If you’re looking for a cash back card, consider whether it matches your spending and, if there’s an annual fee, whether the benefits will outweigh the cost.
Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.
