Credit cards with 1.5% cash-back rewards rates have gone from novel to normal.
Today, consumers can get no-annual-fee cards that offer 1.5% cash back on every purchase from several major issuers — including American Express, Capital One, Barclaycard, Chase, Wells Fargo and U.S. Bank. Citi offers an even higher rate: 1% on every dollar you spend and another 1% on every dollar you pay off.
If you avoid interest charges, these cards can earn you hundreds of dollars per year in rewards without requiring any extra spending. They also signal a big change in the credit card industry.
“For a long time, 1% has been seen as the floor,” NerdWallet credit card expert Sean McQuay said in 2016, when the trend really began to take hold.
How we got to 1.5%
Every big credit card trend starts with one issuer. If the feature is a hit with cardholders, other issuers will introduce it, too.
“Everyone jumps on the bandwagon,” says Tiffani Montez, a senior analyst for the banking consulting firm Aite Group. “But then, as things progress again, everything starts to flatten, and there becomes this new normal for what’s acceptable for cash back. Then [issuers] go look for a new source of differentiation, such as credit monitoring and frictionless rewards redemption.”
The Capital One® Quicksilver® Cash Rewards Credit Card debuted in 2013, offering 1.5% cash back and an annual fee of $0 for the first year, then $95. Capital One also offers a version of the card for people with fair credit, which has the same rewards rate but a $39 annual fee.
Call it the offer that launched a thousand flat-rate cards. During the next three years, other major issuers followed suit, giving us the Citi® Double Cash Card – 18 month BT offer, the Barclaycard CashForward™ World Mastercard®, the Chase Freedom Unlimited®, the Wells Fargo Cash Wise Visa® Card and the U.S. Bank Cash 365 American Express. And AmEx itself climbed aboard with the American Express Cash Magnet® Card in 2018. These cards differentiated themselves with their sign-up bonuses, 0% APR periods and redemption options. But except for the Citi® Double Cash Card – 18 month BT offer, which pays a higher rewards rate, they all made the same basic pitch to consumers.
It’s not too different from what happened 30 years ago when cards began to advertise “up to 1% back.”
In 1986, Sears introduced the first Discover card. It paid out rewards of “up to 1% back,” a more generous offer than any other cards had at the time. But the program was complicated. It gave users:
- 0.25% cash back on the first $1,000 spent.
- 0.5% cash back on the next $1,000.
- 0.75% cash back on the next $1,000 after that.
- 1% on any spending over $3,000.
The card was successful, and other issuers piled on with their own no-fee cash-back cards. They ramped up the rewards rates from “up to 1%” to “up to 2%.” And they added caps that limited how much cardholders could earn.
These cards no longer exist. The 1.5% cards have taken their place — and they’re head and shoulders above what was considered “good” in the ’90s, without the complicated systems of graduated cash-back rates and annual rewards caps.
By coupling 1.5% cards with modern tiered cards — which offer cash-back rates of 3%, 5% or more on certain categories and 1% on everything else — you can boost your combined cash-back rate above 1.5%. But without decades of fierce issuer competition, these cards might not have existed at all.
“It always takes one person to push it a little bit higher, and eventually, the rest will do the same,” Montez says.
What’s next? Probably not 2%
Whenever you see multiple credit cards making identical offers — 1.5% cash back and no annual fee, for example — you know something’s about to change. But it’s hard to predict what that something might be.
Based on cash-back rates during the past few decades, you might think 2% cash back is the next trend. And we’ve seen cards that offer something similar, including the Citi® Double Cash Card – 18 month BT offer. The Fidelity Rewards Visa Signature also gives you a 2% rewards rate if you deposit your earnings in your Fidelity account — not traditional cash back, but close enough.
But so far, these cards are outliers.
“Many banks don’t find it economical to match that rewards rate,” McQuay said. “I think 1.5% will be the max we’ll see from the majority of issuers.”
But there’s a downside. As more issuers release 1.5% credit cards, consumers’ choices become more homogenous. This can make it harder to choose a card. It also makes it difficult for some issuers to stand out.
“I think banks need to do more to differentiate themselves in this 1.5% category. There are quite a few cards, and they’re all virtually indistinguishable,” McQuay said.
How to pick a flat-rate cash-back credit card
As long as issuers stick with the 1.5% rewards rate, here’s how you can get the best deal:
Prioritize long-term value. Cards that pay 1.5% are great. But if you can qualify for a more generous card, choose that one.
If it’s a tie, think short-term. If you can’t get a no-fee card that offers more than 1.5%, use the cards’ extra features as a tiebreaker. Plan on revolving a balance for a few months? Find a card with a good 0% APR period. Traveling overseas? Go with one that doesn’t charge foreign transaction fees. Otherwise, pick the card with the largest sign-up bonus. If you pay your balance in full each month, the interest rates won’t make a difference.
Once you get that flat-rate card, use it for all the purchases that don’t fall under your other credit cards’ bonus categories. You won’t have to settle for “1% on everything else” anymore.
This article was written by NerdWallet and was originally published by U.S. News & World Report.