Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.
Cash back rewards cards are popular. For each eligible purchase you make, you can get just a little bit back in cash. It’s like having your life become just a little bit cheaper.
Are cash back credit cards worth the trouble?
Wading through all of the available options to know which cash back credit card is best for you can be overwhelming or confusing. Do you want 2% cash back on all purchases? 5% back on gas? 2.5% back on cat grooming fees (just kidding)?
Cash back cards can also be dangerous. If you let your spending get out of control in the name of “More Cash Back,” it’s easy to rack up a huge balance that you can’t afford to pay off right away. Interest charges are leagues higher than cash back rates.
Is a cash back card worth it? I decided to find out for myself. Luckily, I track all of my purchases in my budgeting software, so I have a full year’s worth of data to analyze. Last year I spent $41,092.63 on my credit card. I paid it off each month, so this number represents normal spending for me.
I wondered how much could I have earned if I had put my purchases on a cash back rewards card (assuming that all purchases I make are eligible to earn rewards). The results really surprised me…
Calculating cash back earnings
First I needed to find out which cash back credit cards I might have been eligible for. Credit Sesame has a handy tool (included in your free membership) that shows you credit card options, under the My Recommendations tab on your member dashboard.
I’ll break down the math for the cash back cards for my particular situation. I want to make it clear that these are all hypothetical scenarios based on my own personal spending patterns and the assumption that all of the purchases I made were eligible to earn rewards, and if there was a new cardmember bonus, I was eligible to earn it. All calculations are estimates for the first year of card membership, which is the only year that would include any new cardmember bonus in the calculation. Cash back rewards and terms may change.
Quick sleuthing revealed that the Capital One® Quicksilver® Cash Rewards Credit Card offers a super simple rewards scheme: unlimited 1.5% cash back on every purchase. To calculate how much I would have earned last year, all I had to do was multiply $41,092.63 by 0.015.
I am not an existing or previous account holder so I would be eligible to earn the one-time $100 cash bonus. I also would have had to jump over a small hurdle: I would have had to spend $500 on purchases within three months of account opening. I can achieve that by putting all of my spending on this card.
If I had used this card last year and earned the one-time $100 cash bonus, I may have earned an estimated $716.39 in cash back rewards. Not too bad!
The BankAmericard Cash Rewards™ credit card edges it up a bit. Rather than offering a simple flat-rate rewards program that was handy to calculate, it offers a higher cash-back rewards rate in some merchant categories. Luckily for me, I use the budgeting program YNAB (You Need A Budget), which is perfectly designed to create custom reports on my spending patterns over time.
With this card I could have earned 1% cash back on every purchase, 2% at grocery stores and wholesale clubs, and 3% on gas up to the first $2,500 in combined grocery/wholesale club/gas purchases each quarter. The 2% and 3% rates apply up to the first $2,500 in combined purchases in the categories each quarter, after that limit is reached, and for all other purchases, the rate is 1%.
Last year I spent this much in each of the categories:
- Gas – $1,180.65
- Groceries/Warehouse clubs – $8,823.04
- Everything else – $31,088.94
For simplicity, let’s say that I maxed out but did not exceed the $2,500 cap each quarter (it’s very close – my gas and grocery spending for the year totaled $10,003.69, so I know I exceeded the $2,500 quarterly limit by at least $3.69). Looks like I would have earned the full rewards rate (or very close to it) for my purchases for the year. For the calculation, I’ll take the $3.69 off my grocery spending.
This card currently offers a $150 online cash rewards bonus to new cardmembers who spend at least $500 on purchases in the first 90 days of account opening. I would have qualified for that so I included the $150 online cash rewards bonus to my estimated cash back rewards calculations. Estimated cash back rewards I may have earned: $672.70.
Apparently, my husband and I aren’t the gas- or grocery-hungriest of people.
It’s also important to note that by having a banking relationship with Bank of America®, I could have benefited from a customer bonus every time I redeemed cash back into a Bank of America® checking or savings account. With the BankAmericard Cash Rewards™ credit card, I could get a 10% customer bonus every time I redeemed cash back into a Bank of America® checking or savings account increasing my estimated cash back rewards to $739.97. If I were a Preferred Rewards client, I could increase that bonus to 25% – 75%, based on what Preferred Rewards tier I qualify for. With that bonus, my potential estimated cash back rewards increases to between $840.88 and $1,177.23.
I do not have a Bank of America savings or checking account, so the higher cash back amounts would not apply to me.
Back to easy calculations. The Chase Freedom Unlimited℠ is a flat-rate cash back rewards card. Cardmembers can earn unlimited 1.5% cash back on every purchase. This card offers a bonus to qualified new cardmembers: $150 bonus after spending $500 on purchases in your first three months from account opening.
Again, I’ll multiply $41,092.63 by 0.015, and add on the bonus. If I had used this card last year, the estimated cash back rewards I may have earned would be $766.39.
For fun, I also calculated my potential cash back rewards for a fourth card—the Chase Freedom® (not Unlimited). This card offers even higher (5%) cash back rewards on up to $1,500 in combined purchases in categories that rotate every calendar quarter (you have to activate the bonus categories each quarter). In 2016, gas stations earned 5% back in the first quarter, and grocery stores earned 5% back in the second quarter. Wholesale clubs were a bonus category in the 2nd, 3rd and 4th quarters of 2016.
It’s a little more complicated to figure out my cash back on this card, since there were at least seven merchant categories that earned the bonus cash back over the course of the year (gas stations, local commuter transportation, grocery stores, wholesale clubs, restaurants, department stores and drug stores). In addition, this card offers a bonus to qualified new cardmembers: $150 bonus after spending $500 on purchases in your first three months from account opening. I have added this into my estimated cash back rewards.
By my calculations, I believe I may have earned an estimated $952.39 in cash back rewards last year.
Why it’s important to compare cash back rewards offers for yourself
Hopefully, I’ve demonstrated to you why it’s useful to calculate your potential rewards before you decide on a card.
If I had signed up for the first card that hit my fancy — the BankAmericard Cash Rewards™ credit card, perhaps, and especially if I happened to also have a Bank of America® checking or savings account and qualified for Preferred Rewards client benefits — I might have done pretty well for myself. However since I am not a Bank of America banking customer I may have missed out on a serious earning potential with another offer.
Please keep in mind the above calculations were only for the first year of card membership, which is the only year that includes any new cardmember bonuses.
Will I get a cash back rewards card?
Surprisingly, I probably won’t get a cash back rewards card. I like to travel, and for me, travel rewards are far more valuable. Without the travel rewards card I use, I wouldn’t be able to travel as much as I do, and it would be a shame to miss out on my family reunion this year and a fun industry conference, both of which are on opposite sides of the country from me. Based on my personal spending patterns and travel lifestyle, I still choose a travel rewards credit card over a cash back credit card—and for now, I’m perfectly fine with that choice.
Still, this was a useful exercise. You can only make good financial decisions if you have as much information as possible. Choosing a credit card is a personal choice based on your own spending patterns and what you are looking for in a credit card.
Disclosure: This article reflects examples of the author’s experiences and may not reflect the experience of other cardmembers. Earning rewards is based on a variety of factors including but not limited to: each individual’s credit limit on their particular rewards credit card, account activity for making eligible purchases, eligibility to earn rewards and any rewards limit as set by the card issuer. The value of rewards varies by the rewards program and may also vary according to how you choose to use/redeem them. Check the card issuer’s website for rewards information/disclosures before you apply or with your card issuer for more information about your particular rewards program. Terms and conditions may apply.
Advertiser Disclosure: The credit card offers that appear on this site are from credit card companies from which this site may receive compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). This site does not include all credit card companies or all available credit card offers. Credit Sesame is an independent comparison service provider. Reasonable efforts have been made to maintain accurate information throughout our website, mobile apps, and communication methods; however, all information is presented without warranty or guarantee. The editorial content on this page (including, but not limited to, Pros and Cons) is not provided by any credit card issuer. Any opinions, analysis, reviews, or recommendations expressed here are author’s alone, not those of any credit card issuer, and have not been reviewed, approved or otherwise endorsed by any credit card issuer. All images and trademarks are the property of their respective owners.
See the online provider’s application for details about terms and conditions. Offers are subject to change and the terms displayed may not be available to all consumers. Please visit the provider’s site for current information and verify all terms and conditions of any offer prior to applying.
Responses are not provided or commissioned by the bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by the bank advertiser. It is not the bank advertiser’s responsibility to ensure all posts and/or questions are answered.
Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.