How to choose a cash back credit card

Getting ahead with a credit card may seem like a pipe dream, but there are plenty of people who rack up hundreds (or even thousands) in rewards without piling up debt. The key to maximizing cash back credit cards is simple — charge only planned purchases you can afford to pay off each month and never, ever carry a balance.

Cash back credit cards reward consumers with “free” cash back for each dollar they spend. This cash back is added to their rewards account when they use their credit card to pay for purchases, usually as a percentage of each dollar spent. Typically, cardholders can redeem cash back for a check in the mail, statement credits to their account, gift cards and other options.

If a cash back credit card is what you’re after, you still have some important decisions to make. Since credit cards with cash back can be so different, consider what would work best for your spending habits by thinking about the following:

Decide between a simple flat-rate or bonus categories

A flat-rate cash back credit card offers one rate of rewards on everything you buy, such as 1.5 percent or 2 percent back for each dollar you spend. Generally speaking, flat-rate cash back credit cards are best for those who don’t want to deal with rotating rewards categories or earning caps.

Rewards credit cards with fixed bonus categories offer a higher rate of rewards in some categories and a standard rewards rate on everything else. For example, you might earn up to 6 percent back on grocery store purchases, or a higher-than-average rate on dining or transit. In the meantime, you would still earn a standard rate on everything else you buy, usually 1 percent. Fixed bonus category cards are best for those who spend a lot in specific categories and want to maximize their rewards as a result.

Cash back credit cards with rotating categories typically offer 5 percent cash back on up to $1,500 you spend in specific categories each quarter when you activate, after which you earn the standard rate of 1 percent back. Some cards have other bonus categories in which you can maximize rewards throughout the year. Like other cash back credit cards, rotating bonus category cards tend to offer welcome bonuses, 0 percent APR offers or both.

Generally speaking, you should focus on rewards credit cards that offer the highest rate of cash back possible, whether you’re looking for a card with a flat rate, bonus categories or rotating bonus categories. A common and effective strategy is to get a card with bonus categories that fit your lifestyle, plus a 2 percent cash back credit card to earn cash back on your other purchases and bills.

Seek rewards for the spending you do the most

Your spending habits should play a significant role in the cash back credit cards you ultimately apply for. If you happen to spend a lot of money in categories like dining out, groceries or gas station purchases each month, for example, there are plenty of cards that offer a lucrative rewards rate on this spending.

If you aren’t entirely sure which categories you spend the most in right now, it can help to track your spending for a few weeks to see where your money goes. If you use a credit card already, look over your statements to see which categories you tend to spend the most in.

Be aware of any caps on rewards potential

Note whether rewards cards you’re considering set limits on how much cash back you can earn. Some of them do, and these limits are worth tracking if you spend a lot with plastic every month.

For example, credit cards that offer 5 percent back on up to $1,500 in spending each quarter only let you earn $75 in bonus cash in rotating categories every three months. This doesn’t mean they’re not useful; you just need to know the limits you’re dealing with and how they can impact your rewards over time.

Understand your redemption options

You should also learn how to redeem rewards with the cards you’re most interested in. While some cash back credit cards offer a plethora of redemption options, others only let you redeem your cash back for statement credits to your account.

There is no right or wrong answer here; your rewards redemptions should suit your personal preferences, and that’s all that matters. If you want some flexibility, look at cash back credit cards that let you redeem for at least two or three options, including gift cards, travel, merchandise, cash back and statement credits.

Optimize cash back with multiple credit cards

Know that you don’t have to limit yourself to just one cash back card. There are plenty of consumers who successfully manage multiple cash back credit cards, which they use to earn rewards in different categories as well as on miscellaneous purchases. With the right card combination, you can earn hundreds of dollars in rewards on everyday purchases — and easily double your cash back reward.

Factor in the annual fee

Most popular cash back cards are free to own, but there are some with annual fees, which can be as high as $95. However, if the card offers cash back at a high enough rate to offset the annual fee, it may be worth it. You’ll just need to calculate whether the additional rewards you earn offset the fee.

For instance, if you spend a lot on groceries or any other category that has an elevated cash back earning rate such as 3 percent or 6 percent, you could still come out ahead. However, if you find you’re paying money to hold the card even after you account for your rewards, you may want to consider a no-annual-fee cash back card.

Bottom line

Cash back credit cards really do offer the prospect of “something for nothing,” but you’ll benefit only if you are disciplined enough to avoid debt. Be sure to have a plan in place to earn rewards responsibly, and that you have an idea of the type of card you want to sign up for.

With some research and planning, you can earn plenty of cash back in no time.