4 Signs to Consider a Cash Back Credit Card?
If you don't already have a cash back credit card in your wallet, below are four reasons you might want to consider opening one.
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When you decide to open a new credit card, there are many different options to consider. Some credit cards offer rewards in the form of points or miles you can earn each time you make an eligible purchase. Other credit cards may come with perks like introductory interest rates on new purchases or balance transfers that could help you save money for a limited time on certain types of transactions. Finally, cash back credit cards have the potential to give you back a small percentage of each eligible purchase you make in the form of a reward.
Not everyone is a fan of cash back credit cards. But these rewarding financial tools can be a good fit for many consumers. If you don't already have a cash back credit card in your wallet, below are four reasons you might want to consider opening one.
1. You Value Flexible and Simple Reward Redemptions
When you work hard to earn a good FICO® Score, you may be able to qualify for a variety of rewards credit cards. However, while earning travel rewards, airline miles, or points from a specific hotel brand can certainly be nice, the process of tracking and redeeming these types of credit cards can also be complicated and time consuming.
Traditional credit cards rewards programs feature redemption restrictions that limit how you can use the points and miles you earn. And if you want to get the best redemption value possible for your rewards, you may need to combine points or transfer them to travel partners. This process can require a lot of time and research—and even after all that effort you might worry you haven't maximized the value of your credit card points and miles.
Cash back credit cards, on the other hand, are simple. You can typically store cash rewards in your account until you earn enough cash rewards to redeem them either as a direct deposit into your bank account or for a statement credit (depending on the terms of your credit card agreement). This approach is flexible and simple. But as a tradeoff, the value of cash back rewards may be worth less than the rewards you might earn with other types of rewards credit cards.
2. You're Sitting on Unused Credit Card Rewards
Credit cards issuers often make changes to their rewards programs. So, even if the points and miles you earn don't expire, there's a risk they might become less valuable over time.
If you tend not to redeem the credit card rewards you earn on a frequent basis, a cash back credit card might work better for you. A cash back card gives you the freedom to save up your cash rewards for a longer period. However, keep in mind that it still makes sense to redeem your cash back rewards as often as possible and save or invest those funds on your own.
3. You Dislike Juggling Multiple Rewards Credit Cards
Many traditional rewards credit cards offer cardholders the ability to earn higher rewards on their spending in certain categories. For example, a travel rewards credit card may offer a higher rewards rate on flights, hotel stays, or other travel-related purchases. Another rewards credit card might offer you the chance to earn more points and miles on dining, groceries, or gas purchases. Some rewards cards even feature rotating bonus categories and require you to opt in each quarter if you want to earn an elevated rewards rate.
If you want to maximize the rewards possible on every purchase, you probably might open, carry, and use multiple rewards credit cards. This strategy has the potential to pay off (provided you're responsible and pay off your credit card balances each month). But not everyone enjoys the hassle of managing multiple credit cards.
Yet if you dislike the idea of juggling multiple credit cards, a simple cash back credit card might be a better approach. With a flat rate cash back credit card, you always know which card to use when it's time to pay for a transaction and you'll generally never have to worry about opting in for bonus category earnings either.
4. You're Not a Fan of Annual Fees
There are many details to consider when you open a new credit card, including whether or not you want to pay an annual fee for your account. While an annual fee doesn't have to discourage you from opening a credit card, it is wise to confirm that any account you consider offers enough value to offset this type of cost.
On a positive note, there are many cash back credit card options that feature no annual fee. So, if you prefer to avoid paying an annual, recurring expense to maintain a credit card account (while still earning some type of rewards on your everyday spending), a cash back credit card might be a good fit for you.
Drawbacks of Cash Back Credit Cards
Keep in mind that cash back credit cards aren't the perfect solution for every consumer. Therefore, before you apply for this type of account you should review the drawbacks and limitations of cash back cards as well.
- Other credit card options may offer higher rewards rates and more generous benefits.
- Some cash back credit cards may feature earning caps that limit the rewards you can earn on your account.
- You may need a good or an exceptional FICO® Score to qualify for some cash back credit card offers.
- Many cash back cards feature high annual percentage rates (APRs). So, it's important to pay off your full statement balance every month to avoid credit card interest charges.
Bottom Line
There are many reasons a cash back credit card might make sense for you. Perhaps you value a simple rewards redemption process, you tend to hoard credit card rewards, or you dislike the idea of juggling multiple credit cards to maximize rewards. You might even want a cash back card to compliment your existing rewards credit cards.
Just keep in mind that no matter what type of credit card you open—cash back or otherwise—it's essential to manage your account in a responsible manner. Paying on time, every time is a must. You should also aim to keep your credit utilization ratio (the percentage of your available credit limit in use) as low as possible to protect your FICO® Score.
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Michelle Black, Founder of CreditWriter.com is a leading credit expert, financial writer, and speaker with nearly two decades of experience. Her work has been featured with major outlets such as Forbes, Reader's Digest, and U.S. News and World Report.