Finding a Great Cash-Back Credit Card

If yours is one of the 30% of households who carry credit cards but pays off the balance each month (source: Federal Reserve), the interest rate on your cards matters little to you. With many credit cards not charging annual fees, what you want to look for is a credit card with a good cash-back program. Cash-back credit card issuers are tricky, however, and what you see is rarely what you get. So what are some of the best "free money" plans out there?

Cash-back credit cards are better than other reward cards

Many reward cards offer you frequent flier miles, or other incentives, but cold hard cash is hard to beat. Most frequent flier reward cards charge an annual fee for the privilege of giving them business. Then there's the ever increasing difficulty of getting the frequent flier tickets you want.

Other reward cards offer you gift certificates for one retailer or another. Some are affiliated with car manufacturers and offer a discount on your next vehicle purchase. All these rewards limit your flexibility and require you to spend them. Cash-back credit cards provide the simplest, most flexible reward.

You can use the cash-back reward to pay bills, save for little Johnny's college fund, or just put away some money for a rainy day. Of course you can also use the cash-back reward to take your sweetie out to a fancy dinner date without going into debt.

With nearly one in three transactions in the U.S. paid for with a payment card of some sort (source: Visa USA), and over $1 trillion per year just on U.S. Visa cards (source: Visa USA), cash-back rebates can provide a handsome reward for U.S. card-holders.

Not all cash-back credit cards are created equal

Our wallets are saturated with credit cards. That's why it's important to find which ones provide a good cash-back plan. Many websites are dedicated to comparing consumer credit card offers (see Resources box). However, the information there is not complete, and can be misleading.

Quite a few credit cards have hitched a ride on the high prices of gasoline and offer especially high cash-back rewards on gas purchases. These can be as high as 5% or even 10% for a few months, after which they settle back to 1% - 5%.

The better cash-back offers not limited to the first few months offer 3% back on some types of purchases and 1% on all others. The best of these also offer a 25% bonus on top of the cash-back reward if you hold off on redeeming the reward until you've accumulated $200.

Tricks issuers play

One of the most common tricks played by cash-back credit card issuers is high "teaser" cash-back rates that expire after a few months. Other tricks are dollar limits on higher cash-back rates, or on total cash-back rewards. These are not apparent from the up-front come-ons.

Since each issuer's cash-back offer is different in its details, it is not possible to make a general statement about which is best in all cases. To find the best card for you, you will need to estimate how much you're likely to charge on the different categories and calculate for each potential cash-back card what your reward would be.

What are some of the better cash-back credit cards out there?

Although a general comparison is not possible, here are some of the better cash-back cards out there. The Chase Freedom Cash Visa Signature card has a flexible and generous cash-back plan, with no annual fee.

Each billing cycle Chase calculates your spending on each of 15 categories. You receive 3% cash-back for the three categories you charged the most for. All other purchases that month are credited 1% cash-back. However, the 3% rate only applies to the first $600 charged in the 3 highest categories each month. This limits the bonus cash-back above 1% to $144/year.

If you hold off on redeeming your cash-back reward until you have $200, Chase will give you a $50 bonus reward. This in effect increases your cash-back rewards to 3.75% and 1.25%. Finally, as a little extra one-time bonus, Chase will throw in $50 once you've made your first purchase using this card.

The Citi Professional Cash card is another good option. This card can be used for business and personal expenses. With no annual fee, it offers 3% cash-back on gas, restaurants, certain office supply merchants and auto rentals.

All other purchases qualify for 1% cash-back. The rebate is limited to $300/year if you call in to request a card. If you take advantage of the internet offer that limit is $500/year. Rebates from partner retailers are not subject to the annual cash-back limit.

American Express offers a generous, if less flexible cash-back card for business use. The American Express Simply Cash Business card has no annual fee and offers 5% cash-back on wireless, gas and office supplies. The card offers 1% cash back on all other purchases except those charged at discount stores such as CostCo's, Sam's Club, etc.

American Express is accepted by fewer merchants than either Visa or Mastercard, but it is the only card accepted by CostCo's. The American Express Blue Cash card is less generous than its business cousin and only allows rebates to be redeemed 14 months after the account is opened.

Comparing cash-back rebates with hypothetical scenarios

Let's look at three hypothetical consumers. John Spender charges $5000 on average each month, of which $2000 is in "high cash-back" categories. Joe Average charges $2000 in an average month, of which $1000 is in the higher reward categories. Jane Frugal charges only $400 on average each month, of which $200 is in "high cash-back" categories.

John Spender's rebate with a straight 1% cash-back card would be $600. With the Chase Freedom card he'd receive $744 each year. If he waits and redeems $200 at a time, his annual average rebate would increase to $930.

If John uses a Citi Professional card, his rebate would be only $300 ($500 if opened through the more generous internet offer) due to the annual limit. With an AmEx Simply Cash card, assuming this is for John's business, the rebate would be $1560.

If Joe Average was to use a cash-back card offering a 1% rebate, he'd get back $240 each year. With the Chase Freedom card he'd get $384 per year. If he only redeems his rewards when he reaches $200, he'd get an extra $50 each time, bringing his annual average up to $459.

With the Citi Professional card Joe would receive a rebate of $480 each year (assuming he got it through the more generous internet offer), while the AmEx Simply Cash card would provide the most rewarding $720 rebate. Of course this last would only hold for Joe's business.

How about Jane Frugal? With her low spending, she could only expect $72 each year from a 1% cash-back card. Chase Freedom would increase that to $120 per year, but if redeemed in chunks of $200, her average annual rebate would increase to $150. Her rebate with the Citi card would be $120. The AmEx card would reward her business with $168 each year.

Which card is best for you?

If you're in the market for a business credit card and don't mind that many merchants do not honor it, the AmEx card is your best option. That is if a large fraction of your charges is in the categories AmEx rewards the most.

If you're looking for a personal cash-back card and your total charges are modest, the $50 bonus offered by Chase for redeeming $200 at a time makes this the card for you. If your charges are very high, the Chase Freedom is also best because it does not limit the total rebate. Between the two limits, the Citi card offers a slightly higher reward.

If you know you're likely to purchase a new vehicle, some cards that offer 1% cash-back will triple that if you use the reward to reduce the price of (e.g.) a GM vehicle. If most of your charges are for travel, and especially for gas, a gas-rebate card such as Chase's BP Visa card offers 5% on BP gasoline, 2% on other travel charges and 1% on all others. These cash-back rewards are doubled for the first 60 days.

Conclusion and words of caution

To get the best cash-back credit card for you, check your charging habits over the past year. Use the information to calculate your expected cash-back reward from each of the above cards. Then, simply follow the appropriate link and apply.

If you're willing to do a little extra click-work, simply use some of the comparison sites (see the Resources box) to check if some more recent offer may not be better for your particular situation.

Some last words of caution are in order here. Your credit score is affected by a large variety of factors. Applying for too much credit, with too many creditors, too quickly can reduce your score. Charging anywhere close to your credit limit will also affect your score negatively.

Keeping a balance on credit cards is generally a bad idea, and will cost more in interest than any cash-back rebate you may receive. Keep your debt to a minimum and cash-back rewards can be a pain-free way of getting a bit of extra spending money. Better yet, use your reward to save and invest and you gain even more. Good luck!