Best Cash-Back Credit Cards From Surprising Places

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In 1986, Discover (DFS) changed the credit card world forever with the launch of its cash-back credit card. The Dawn of Discover advertising campaign, showcased at the Super Bowl, promised to transform how Americans interacted with credit. Most credit cards charged an annual fee and offered no rewards or cash back. Discover eliminated the fee and shared some of the rich interchange with consumers in the form of cash back. Since the launch of Discover, cash-back credit cards have become incredibly popular all over the world. And the market has also become incredibly competitive. Whereas Discover started with 1 percent unlimited cash back, we have seen ever-increasing cash back rates offered.

There are two types of cash-back credit cards: cards that pay a flat rate of cash back on all purchases, and cards that pay higher rates in specific categories.

The flat rate market had historically been dominated by Capital One (COF), and the promise of unlimited 1.5 percent cash back on Quicksilver made by Samuel L. Jackson. However, Citibank (C) has eclipsed Capital One with the launch of Citi Double Cash, which pays 2 percent unlimited cash back. You earn 1 percent when you make the purchase each month. If you make your payment on time, you will earn another 1 percent, bringing the total to 2 percent. For a family spending $2,000 per month on their credit card, they could earn $480 of cash back annually.

Earn at Least 2 Percent Cash Back

So, everyone should be earning at least 2 percent. But, if you are focused, you can earn even more cash back by focusing on some of the cards that pay higher rates in certain categories. You can earn, on average, between 3 percent and 5 percent on your spending. At MagnifyMoney, we have reviewed nearly 2,000 credit cards and compiled a list of the best cash back credit cards for most major categories. And the results are surprising: there are many credit unions and smaller banks you wouldn't normally consider when looking for the best cash-back deal. Here are some of the best cards in the most popular categories:
  • Airfare: If you buy a lot of airline tickets, you should consider the PenFed Premium Travel Rewards credit card, where you can earn 4.25 percent cash back on your spending. It is easy to join PenFed.
  • Gas: Even though gas prices have gone down, there is no reason why we shouldn't make it cost even less. With the Fort Knox Credit Union Platinum Visa (V), you can earn 5 percent unlimited cash back. You do have to join the credit union ($5 to join), and you must have a qualifying account -- like a checking account. However, if you spend a lot on gas, it can quickly be worth it.
  • Supermarkets: PenFed scores high again with its PenFed Platinum Rewards credit card. You can earn the equivalent of 2.25 percent unlimited cash back on your grocery spend.
  • Dining: If you like to eat out, the Chase (JPM) AARP Visa offers 3 percent unlimited cash back on dining.
Although these are the most popular categories, you can find ways to earn extra cash back in many other categories, including book stores, car rentals, furniture, gyms, hotels and more.

The Fine Print Alert

Cash-back credit cards can be a great way to put extra money in your pocket. But, if you don't follow a few rules, you could end up losing money on the deal.
  • Only charge on your credit card what you can afford to pay off, in full, every month. If you are unable to pay the full statement balance on your credit card, you will end up paying very high interest rates. Citi Double Cash charges between 12.99 percent and 22.99 percent. In just a few months, you could easily end up paying more interest than the cash back that you earn. Credit unions do tend to charge much lower interest rates. For example, PenFed Rewards charges 9.99 percent. Although much lower than the rates charged by the big commercial banks, you should still try to pay your balance in full every month.
  • Pay on time. Late fees can be very expensive. Although Citi waives the first late fee, subsequent late fees can be up to $35. In addition, many banks will increase your interest rate (on your go-forward purchases) if you are late with a payment.
  • Avoid cash withdrawals at ATMs using your credit card. The interest rates are very high on a cash advance (close to 30 percent), and there is no grace period (interest is charged right away).
Finally, if you are spending regularly on your credit card, you should not complete a balance transfer on the same card. If you make a balance transfer, you generally lose the grace period on purchases, which means interest will start accruing right away on your purchases unless you pay the full balance (including the balance transfer).

If you don't have the discipline to spend within your means and pay your balance in full and on time every month, then you should avoid cash back credit cards. However, if you have the discipline, it is easy to earn at least 2 percent on all of your spend. And, with a little bit of work, you can get much more than 2 percent. This money adds up. And if you really want to save for retirement without thinking too hard, consider the Fidelity American Express (AXP). You earn an unlimited 2 percent cash back, and the money is automatically deposited into your retirement account at Fidelity. Rather than using the cash back to indulge, you can make it a painless part of your retirement strategy.

Nick Clements is the co-founder of MagnifyMoney, a price comparison website that helps you find the cheapest bank accounts, and the best interest rates on your savings and your debt. He spent nearly 15 years in consumer banking, and most recently he ran the largest credit card business in the U.K. You can follow him on Twitter @npclements
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