By Fran O’Rourke – KeyBank Capital Region President
If you’ve used a rewards credit card, you know the drill: after you buy something with the card, points appear in your account. You can then redeem those points for a plane ticket, gift card, or some other prize. A cash rewards credit card is similar in that it rewards you for making purchases, except that the rewards are in dollars, not points, and can be redeemed for cash back.
What Is a Cash Rewards Credit Card?
A cash back or cash rewards credit card gives you cash rewards for spending. The reward is usually a percentage of the amount you spend. Therefore, if a card offers 1 percent cash back, spending $4,500 over the course of a year would give you a reward of $45. Typically, you can choose to either apply your cash reward toward your statement or to transfer it to a checking or savings account.
Know Your Rewards
There are four different kinds of credit card cash rewards:
Flat-Rate Rewards: With flat-rate rewards, you get the same percentage back regardless of the amount you spend. It doesn’t matter if you spend $1 or $1,000 — the rewards percentage is always the same.
Tiered Rewards: A tiered rewards program offers different levels of rewards depending on how much you spend or other criteria. For example, you might earn 1 percent cash back when you spend under $2,000 in a quarter or 1.5 percent cash back once you’ve spent more than $2,000. Some rewards cards offer special tiers to existing bank customers based on their relationship.
Category Rewards: Some rewards cards offer different levels of cash back for different spending categories. For example, a card might give 3 percent back on spending at gas stations, restaurants, and grocery stores, but only 1 percent back on all other purchases.
Bonus Rewards: A cash back bonus is usually offered as a perk for opening a new account. After using the card for a certain period of time or spending a minimum amount of money, you get a one-time cash reward.
Why Use a Cash Rewards Card?
A cash back card gives you a reward that’s always valuable. Not everyone needs airline points or other credit card rewards, but everyone can use money. With a cash back card, you can spend your rewards on whatever you’d like. For example, if you’re saving to make a large purchase further down the line or hoping to add more to your rainy day fund, you can redeem your rewards into your savings account. Plus, cash rewards are easy to keep track of and redeem. Just log in to your credit card account to check what percentage you’re getting back, see how much cash back you’ve earned, and decide how you’d like to redeem it.
Before choosing a credit card, compare your options. For many people, the convenience and flexibility of a cash rewards card makes it a great choice.
About the author: Fran O’Rourke is president of KeyBank’s Capital Region. She may be reached at either 518-257-8733 or [email protected].
Smart Credit Building Tips
Charge wisely: A smart way to start building your credit history is to ensure you never charge more than you can pay off in a single month.
Remember, balances matter: Did you know your credit score is partially based on how much credit you have available? This means that if you have two credit cards with $500 limits but only $200 available across both cards, your score will lower. Try to keep month-to-month balances you can’t pay off at no more than 30 percent of your credit limit per card.
Make payments on time: A single payment made 30 days late can have a significant impact on your credit score. Set reminders in your calendar for five days before any payment is due so you can schedule a payment online. On-time payments mean an easier road to building credit.
Budgeting: A financial plan provides you with a road map that can help you keep track of your spending so you can reduce your debt, grow your savings and improve your credit health. Once you have a solid plan, you can feel confident that you’re spending and saving in a way that aligns with your priorities.
Credit application quantity and frequency: Credit cards can help you establish a credit history and reward your spending with cash and other perks. But proceed with discipline. Debt that’s racked up and not paid back can negatively impact one’s credit score.
Monitor your credit: A credit report shows how you’ve used credit in the past, and your credit score predicts how you’ll use it in the future. It’s wise to stay on top of both so you can watch for errors and see the results of your credit-building efforts. You can request a free report from each of the three credit reporting bureaus (Experian, TransUnion, and Equifax) each year. And some financial institutions, such as KeyBank, offer their clients free access to their FICO® Score.