Is 2% Cash Back Really Worth It?

It's free money, and cash back dollars do add up.
By NerdWallet 

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This is a guest post from Ask Mr. Credit Card.

At Ask Mr. Credit Card we love getting questions from our readers. We wanted to share a recent question with you since it’s one we get pretty often: Is a 2% cash back card really worth it?

Mr. CC, I am debating on whether or not a cash back credit card or a reward point program would be best for me. Is 2% cash back really worth it in the long run? It doesn't sound like much.

First thing's first

We're comparing apples to oranges. Reward points programs and cash back programs are different. In a cash back program (like programs from Discover) companies are offering you a percentage back that they simply pay out once or twice a year. It's a great way to get a little bit back. Forgetting the percentages, having a surprise check come in the mail every now and then is nice.

So, at face value, of course it's worth it! Who doesn't want to get a little check from your credit card company?

Rewards programs give you points back that you can redeem towards products or services. Some of them have caps for the redemption of the points, however. For example, GM has a credit card that offers a percentage back in points that are redeemable for new GM vehicles. However, you can't pay for a whole car with credit card points. Still, they might allow you to redeem anywhere between $1,000 and $3,000 towards the purchase of a new car.

Remember, cash is not limited. Once someone gives it to you, you can spend it on anything you want, and that's the difference between rewards programs and cash back programs. I'm not saying rewards programs are bad (I belong to one), but cash can go wherever you want it to go.

Like I said, they're really different. So, let's see what you're really after, shall we?

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Know what you want

I'm not saying that you have to know the meaning of life, psychically predict exactly when you'll need a new car, or plan to shop online with credit card points for the rest of your life, but you need to know what you want.

It's a simple question:

Do I want to just get the cash back and do what I want, or do I want to use a rewards program that will help me purchase something big like a vacation or a car? What about getting rewards for hotel rooms or plane tickets? There are even some gas reward cards on the market.

Almost invariably, you will feel a strong inclination towards one or the other. If you're leaning towards a cash back program, then you need to find out if you're getting a fair amount back. You may be able to get more return on spending through a rewards program. Do your homework and see what you qualify for and THEN you can make a move.

So, you're right, is 2% enough?

The raw numbers

The average American spends about $100 a week at the grocery store and about $50 a week gassing up their car. If you live in a place where you're getting gouged on gas prices, then that number might be higher, but you get the idea. If you've never considered what this line item on your budget looks like, now is a good time to figure it out. Without solid numbers, you won't be able to accurately predict what you're going to get back from using the card.

So, we're going to assume that we're going to be "average" and use the card to make all of our gas and grocery purchases during the year. Of course, you occasionally purchase things with cash and you may put other things on your card as well, but, for now, we'll stick with the basics.

Here’s an example: If you spend $5,200 a year on groceries ($100 a week) and $2,600 a year on gas ($50 a week) then you'll get $156 back every year on a 2% cash back card.

With some simple multiplication, that means you'll get $312 in two years and $468 in three years. Now, are you planning on saving up this money, probably not, but you can see that, over time, the cash back dollars do add up. If you think ahead to things that you enjoy, you may want to plan to use that little check to do something cool every year. Its "free" money, after all, so you may want to have a plan. Remember, this goes back to knowing what you want. Have an idea of where you're going before diving in to cash back over rewards.

Is it REALLY worth it

I know I said before that any amount of money is better than nothing, and that's still true. However, could you really get more somewhere else?

Well, consider a 3% cash back card like Bank of America's Visa Signature. From there the math is completely different. Spend $5,200 a year on groceries and you get back $156. Then, spend $2,600 a year on gas and get another $78 back. That's a card with a one percent cash difference and you're already up $78! Wouldn't you prefer to get more back simply by using a different card? True, there may be a different APR, etc., but if it were all equal -- you'd go with the 3% card.

What if you: • Can't qualify for the Visa Signature from Bank of America • Or can't qualify for anything other the 2% card you found

Then we're back to worthiness!

Extreme frugality

In some instances you can combine your 2% cash back with coupons, rebates, store rewards and loyalty programs and really make things worthwhile. If you were to say, use coupons regularly, and then use your cash back card when you shop for groceries each month, it’s like getting an extra 2% discount on top of the coupons. It’s a really nice frugal tool when you keep track of it and plan your finances in order to maximize the return.

Take everything we've talked about into consideration before making a decision, and you'll surely be happy with what you chose. Don't pick something and regret it later when you finally find a better deal.

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