In comparing flat-rate cash-back credit cards, the decision seems easy: Pick the card with the highest rate of cash back. A credit card with 2% cash back or more beats a card that offers just 1.5% cash back, right?
You have to factor in sign-up bonuses, which tend to be lower or nonexistent on cards that offer 2% cash back or more. In a typical case, you might have to spend tens of thousands of dollars on a 2% card to make up for the cash bonus you can earn quickly on a 1.5% card.
You might have to spend tens of thousands of dollars on a 2% card to make up for the cash bonus you can earn quickly on a 1.5% card.”
Here’s how to figure out which flat-rate cash-back card is right for you.
In the example of a 2% card versus a 1.5% flat-rate cash-back card, the difference is 0.5% on all your card spending. Also typical, the 1.5% card has a $150 bonus, and the 2% card has none.
The question: How much spending must you do while earning an extra 0.5% on the higher-rate card to make up for not getting a new-cardholder bonus?
The answer is $30,000.
Do the simple math by dividing the amount of the bonus by the difference in cash-back rate. So:
$150/.005 = $30,000
In other words, the 2% cash-back card is the worse choice until you hit $30,000 in spending. That’s the break-even point.
Nerd tip: Annual fees are uncommon on flat-rate cash-back credit cards, but if there’s an annual fee, it should factor into the math. Think of the annual fee as reducing your total cash back.
Use the calculator below to find the break-even amount for two cards you’re considering:
The next big question is how long will it take to break even? In our example, spending $30,000 on the card might take three years for some people. For others, it might take six months. Answering that question will help you choose.
A real example
A NerdWallet perennial favorite among flat-rate cash-back cards is the Citi® Double Cash Card – 18 month BT offer. It essentially offers 2% cash back, 1% when you make a purchase, then 1% when you pay it off.
Its major drawback? Sign-up bonus: None.
NerdWallet also likes the American Express Cash Magnet® Card. It offers 1.5% cash back on all purchases. Its welcome offer is: Earn a $150 statement credit after you spend $1,000 or more in purchases with your new Card within the first 3 months of Card Membership. Terms Apply.
This illustrates the scenario in the math above: It would take spending $30,000 on the Citi® Double Cash Card – 18 month BT offer before you made up for the cash welcome offer on the American Express Cash Magnet® Card.
How to choose
Go with a higher rewards rate and no bonus if ...
You’re a high spender
You’ll quickly make up for not getting a sign-up bonus, and you'll continue to earn more cash back for your spending year after year.
You’re patient and value simplicity
If you don’t want to think too much about which credit card you have and will keep it for many years — say, three years or more — the higher-rate card is likely to be a better choice. You have plenty of time to make up for not getting a sign-up bonus before you think about switching cards.
Go with a lower rewards rate with bonus if ...
you’re a low spender
Take the bonus and the lower cash-back rate because it could take years of spending on the card before you earn enough cash back to make up for forgoing the sign-up bonus. Just make sure you spend enough initially to earn the sign-up bonus.
you want cash soon
If you value near-term rewards or need a cash infusion quickly, choose a card with a sign-up bonus.
you’re disloyal to your credit cards
Disloyalty to credit cards isn't a bad thing. If you are willing to readily switch cards and have the credit scores to handle it, applying for new ones every few years can pay off. It allows you to take advantage of the newest offerings and earn new sign-up bonuses. Sometimes lucrative bonuses and perks are offered for a limited time. Being opportunistic can pay off.
the flat-rate card isn’t your main card
If your spending on the flat-rate card is low because you use it only as the "everything else" card in conjunction with a bonus-category rewards card, the 1.5% card might be the better choice because you get that cash bonus quickly, assuming you earn the bonus by spending enough on the card soon after you get it. Your low spending means your break-even point might be years away if you go with a 2% card without a bonus.
Consider other factors, like 0% APR
The main point of a flat-rate cash-back card is rewards cash. But other factors can matter, too. A flat-rate card might have perks, like cell phone insurance, or no foreign transaction fees for using it abroad.
But the biggest one might be a 0% APR period. Some flat-rate cards offer lengthy periods of no interest on purchases and/or balance transfers. That’s a totally different consideration than cash back, but it could mean a big difference in dollars if you can avoid interest for a time.
In our real example, here are the 0% APR periods:
In sum, sign-up bonuses matter in credit card math. It’s how 1.5% cash back can beat 2% cash back.