In the days before cash back rewards, credit cards often came with sizable annual fees and no spending bonuses. But it only takes a quick look at today's best cash back credit cards to know that those days are over.
As easy as these offers may make it seem to earn while you spend, it's still important to pay close attention to the terms of your credit agreement. Cash back credit cards can be great for your personal finances when used cautiously, but the deals might come with certain conditions that could negate your rewards if you aren't careful.
How cash back credit cards work
It might sound crazy to hear that you can earn money by spending it, but cash back rewards credit cards really can transform your monthly expenditures into extra cash. Here are some of the ways that cash back credit cards pay you for spending:
- Percentage points - Most cash back rewards credit cards use a percentage system to determine how much cash you'll get back. The base rate for these reward percentages is usually between .25 and 1 percent, although better rates may be available under restricted conditions.
- Cash back bonuses - A few of the cash back credit cards on the market offer you extra incentive to spend early. Often, reward amounts of $100 to $200 can be earned for spending $500 to $1000 in the first few months of owning your card.
- Purchase categories - Several of the cash back rewards credit cards available today let you to choose a few purchase categories -- groceries, restaurant dining, gas and others -- in which you get a percentage increase in your cash back. Credit cards with category provisions can give as much as 5 percent cash back on purchases in your chosen categories.
- Partner programs - Credit companies sometimes coordinate their cash back credit card promotions with particular retailers, restaurants, and charitable organizations. In these cases, you can get higher percentage rates or other extra rewards by using your cash back credit card at these partner businesses.
Unlike points credit cards, cash back credit cards typically require no action on your part to redeem your rewards. Most cash back rewards credit cards will simply credit your account at the end of the month, year or fiscal quarter.
How to take advantage of cash back rewards credit cards
There are a few ways to get the most out of your cash back credit card. All of these strategies require a certain amount of patience and financial discipline, but the payoff can be big if you handle them right.
One quick and fairly safe way is to build your savings until you can afford a big-ticket item, such as a car or a piece of high-tech equipment. Then, open a cash back credit card with a spending limit high enough to cover your purchase and charge it, reaping the cash bonuses while being able to pay down your balance that same month.
A way that's longer-term and slightly riskier would be to open a cash back rewards credit card just before you're prepared to allow yourself to take on an amount of debt. The holiday season is a great example, or the beginning of a college semester. Then use the card to make your necessary purchases and pay the balance down in time to avoid letting interest cut into your rewards.
The simplest way -- using your rewards card for everyday purchases and making regular payments each month -- can also earn you significant gains. This is especially true if you use the card in ways that increase your reward percentage, such as those listed above, and pay careful attention to your month-to-month balance. By doing this, your cash back rewards credit card can pay you back on your spending year after year.