How to compare cash back credit card offers

By Ben Woolsey

Cash back credit card offers can all appear the same sometimes. The general perception is that they are like Henry Ford's Model T -- you can have any color you want as long as it is black. The reality is that there are many variations of cash back reward programs so it pays to do a little homework before you choose your cash back rewards credit card.

Discover Card was the original pioneer with credit card cash back programs and continues to enjoy a strong brand association in  American consumers' minds with the cash back concept. The cash back rewards program began with a flat 1 percent cash back formula but has evolved into a somewhat complex tier system that pays varying percentages of cash back based on different thresholds of spending. Most cash back rewards programs offered by Visa, MasterCard and American Express also follow this arcane formula, which allows the bank to promote the top cash earning tier in advertising but only requires them to pay a diluted average, i.e. much less than advertised. For instance the first tier of spending, say $0 - $1,500, typically earns in the range of .25 percent to .50 percent. The next tier might be .50 percent to .75 percent, and so on up to whatever level the top tier is set.

Comparing the required spending tiers and related earning percentages is critical to being able to the proper analysis of these cash back rewards programs. Otherwise you are comparing apples to oranges.

There are also straightforward cash back rewards programs in the market, such as the Citibank Dividend Rewards MasterCard. Under this reward program you earn a flat 5 percent cash back on gasoline, grocery and drug store purchases and a flat 1 percent on all other purchases. For the average family this program can produce significant rewards.

Another important comparison factor involves how you receive your cash back. Some provide your earnings in the form of a statement credit. This is probably the easiest delivery process for the bank since it is electronic but may not be as satisfying since it is reflected as a reduction in your outstanding balance. Other credit card companies will mail you a check, either on an annual basis or once you have hit a dollar earnings threshold of $25, $50 or $100. This comparison is a bit more subjective but since credit card companies often put the responsibility on you to call and claim your earnings there is the risk of forgetting. A significant percentage of earned rewards go unclaimed so it's important to remain diligent and monitor your earnings, either online or by calling your credit card company.

Published: September 22, 2005

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