But this rule of thumb doesn’t apply to all people. Learn more about how to use this rule of thumb and its limitations.
What Is the Rule of Thumb for Earning Cash-Back Rewards?
Using a rule of thumb for cash-back rewards can help you maximize the value of your credit card, while preventing you from piling up debt.
Choose a Card That Earns at Least 1.5% on All Purchases
Cash-back cards generally fall into two categories:
Flat-rate cash-back cards: One cash-back percentage for all purchases. Bonus category cards: A base cash-back rate with higher cash-back percentages in certain categories, like groceries, restaurants, or gas (for example, 3% back on groceries, 2% on gas, and 1% on all other purchases)
Given these two options, the rule of thumb is to choose a flat-rate cash-back card with the highest percentage back that you can find in a card you’re likely to qualify for based on your credit. Aiming for a flat-rate card that offers 1.5% cash back is a good rule of thumb. Several of the major card issuers have such cards (the Capital One Quicksilver and the Wells Fargo Cash Wise card are two examples). However, it’s also possible to find flat-rate cards with even higher cash-back rates. For example, the Citi Double Cash Card offers 2% cash back on all purchases: 1% when you make a purchase and 1% when you pay it back.
Always Pay Off Your Entire Balance Each Month
Part of the cash-back rule of thumb is another rule that goes for using any kind of credit card: Always pay off your balance in full each month. If you do, you’ll avoid interest, and using your card will be fee-free if there is no annual fee and you don’t make late payments. Should you carry a balance and owe interest, what you pay could easily exceed what you earn in cash back. Credit card rewards often spur you on to buy more than you need, and that’s how a lot of people end up in debt. If you make it a personal rule to always pay off your balance, it’ll never creep up beyond what you can pay. You’ll get all of the benefits of credit card rewards without any of the downsides of debt.
Pair Your Base Card With a Bonus Category Card—If You Want
Choosing the highest flat-rate rewards card you can find gives you a good base for all of your spending. But another rule of thumb for rewards cards is to pair your base card with a card that offers an even higher rate of cash back on bonus categories like takeout, travel, groceries, and other categories. You’ll earn the best of both worlds: high cash-back rewards on specific purchases and a solid flat rate on all other purchases. Most bonus-category cards offer a low cash-back flat rate on all non-bonus-category purchases—typically 1%—but that’s less than most flat-rate cards, which offer 1.5% or 2% cash back. So let’s go back to our example card that earns 3% on groceries, 2% on gas, and 1% on everything else. You could use that card for groceries and gas and use a 1.5% flat-rate card for everything else. It’s important to keep in mind that this rule of thumb is optional. You don’t have to get a bonus-category card. If you do, you’ll need to manage two (or more) cards instead of one. If that means you’re less likely to pay off all your charges each month, it’s not worth it.
Grain of Salt
Keep in mind that you’ll need good or excellent credit to qualify for the best cash-back credit cards. If your credit could use some work, it might be a better idea to work on improving your credit first, because this will help you in other areas of your financial life, too. Many people also use travel rewards cards to earn points or miles to pay for trips. While you can use cash from a cash-back card to finance your travel, choosing a dedicated travel card can help earmark those rewards so you’re not tempted to spend them on other things. And your travel points may be worth a little bit more than cash back when redeemed for flights or hotel stays. In that case, choosing a travel rewards card might be best for you, even if the rewards aren’t as flexible as plain old cash back.
