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The 3 Different Kinds of Cash-Back Credit Cards

Cash Back Credit Cards, Credit Card Basics, Credit Cards
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Getting paid to spend money is the dream. That’s why cash-back credit cards are so appealing.

Cash-back cards come in three varieties, based on how they dole out rewards:

  • Flat-rate cash-back cards
  • Tiered cash-back cards
  • Bonus category cards

No rewards are more flexible than cash, which is a key reason why 51% of customers prefer cash-back credit cards over cards that offer rewards points or airline miles, according to a 2015 survey by the American Bankers Association.

“If you’re not traveling often, the miles expire,” says cash-back fan Kathy Ng of Pasadena, California. “With cash back, I know I’ll always get rewarded.”

Expiration shouldn’t be an issue with cash-back rewards, since redemption tends to be easy and flexible. Cash back can be taken as a credit on your statement; depending on your card, it may also be deposited into your bank account or sent to you as a check.

If you’re serious about snagging cash-back rewards, here are your options, as well as our tips on how to power up your earnings.

Flat-rate cash-back cards

Flat-rate cash-back cards give you the same rewards on every purchase, with no limit to the amount you can earn.

For example, the Citi® Double Cash Card – 18 month BT offer earns 1% cash back on every dollar you spend, then another 1% cash back for every dollar you pay off. A slew of other cards offer 1.5% cash back upfront on every purchase.

Those rates might not seem like much at first glance, but they add up, especially when you use your flat-rate card for everyday purchases and pay the bill in full each month. For $10,000 in annual purchases, that’s $150 to $200 in cash.

If you value simplicity above all, go with this option. If you’re willing to put in a little more work, pair your flat-rate card with a tiered or bonus category card to boost your rewards even further.

FeaTUREs TO LOOK FOR

  • A cash-back rate of 1.5% or better
  • No annual fee
  • A sign-up bonus of at least $100

» MORE: 1.5% cash-back is the new gold standard in credit cards

Tiered cash-back cards

Tiered cash-back cards pay higher rates in specific spending categories, such as gas or groceries, and a lower rate (usually 1%) on all other purchases. In some cases, the higher rates are available only up to a certain spending limit.

If your spending tends to be concentrated in the higher-earning categories, a tiered rewards card can return more cash overall than a flat-rate card. To earn more cash back, though, you can combine a tiered card with a flat-rate card.

Let’s say you have two cards: A flat-rate card that pays 2% on all purchases, and the Blue Cash Everyday® Card from American Express, which gives you 3% back on up to $6,000 a year in spending at U.S. supermarkets, 2% back at U.S. gas stations and select U.S. department stores, and 1% back on everything else (terms apply). If you were at the supermarket, the tiered card would obviously be the better option.

But once you hit the annual cap on 3% spending, the flat-rate card becomes the superior choice. Meanwhile, if you were at, say, the hardware store, you’d reach for the flat-rate card first, since its 2% beats the 1% “everywhere else” rate on the tiered card.

Features to look for

  • Categories that match your major budget areas
  • A top rate of at least 3% — or higher if there’s an annual fee
  • No annual fee, or elevated rewards rates that more than make up for the fee
  • A sign-up bonus of at least $100

» MORE: Beware of minimum redemption requirements

Bonus category cards

Bonus category cards offer a high cash-back rate on specific categories that change periodically, usually every three months, and a low flat rate on everything else. The spending eligible for the high rate is usually capped, and you have to opt in or “activate” these categories each time around. It’s more work, but you can pocket more money.

A bonus category card can work as the only card in your wallet if you think you’ll max out the bonus categories every quarter. But it’s more effective when paired with a flat-rate card to use outside the bonus categories. For maximum cash back, combine it with a flat-rate card and a tiered card.

The Chase Freedom®, for example, offers 5% in rotating quarterly categories, on up to $1,500 in spending per quarter, and 1% on everything else. In the first quarter of 2017, this card offered 5% cash back on ground transportation, such as taxis and subway rides. Continuing the example above, if you were using all three kinds of cards during that quarter, you would have earned 5% on ground transportation with the Chase card, 3% on groceries with the AmEx, and 1% + 1% on everything else with the Citi card.

If you spent $100 in each category, you would earn $10 back using a combination of all three cards. The flat-rate card alone would earn just $6 for the $300 spent; the bonus category card would earn $7; the tiered card, $5.

Features to look for

  • Bonus categories that match your spending
  • No annual fee
  • Sign-up bonus of at least $100

Mix and match to get the most cash

About 1 in 5 cardholders have cards with fees and rewards that do not align with their spending habits, according to a study from J.D. Power. So determining the “right” card or cards for you depends on how and where you spend your money, and your taste for complexity.

A flat-rate card is best if you want to keep the process simple. If you’re willing to put more work and thought into your cards, a tiered or bonus category card could earn you more. To squeeze out the most possible rewards, carry one of each type and use them strategically.

One important footnote: Rewards cards of any kind are worth the effort only if you pay your balance in full each month. Carrying a balance from month to month incurs interest charges that can eat up the value of your rewards. If you expect to carry a balance, look for a low interest credit card instead. 

» MORE: NerdWallet’s best cash-back credit cards

Melissa Lambarena is a staff writer at NerdWallet, a personal finance website. Email: mlambarena@nerdwallet.com. Twitter: @LissaLambarena.