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Cash back cards become more generous with rewards

Summary

Cardholders who prefer consistent, simple cash back rewards over points so card issuers are offering bigger incentives to sign up and cash out every month.

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Responding to strong demand for simple rewards, credit card issuers are churning out new cards with bigger and bigger payouts of cash back.

For the past few years, cash back card reward programs have become generous – and complex. While they offer big sign-up bonuses and big payoffs, they require customers to track quarterly categories and jump through hoops to earn and spend points.

Now, card issuers are pursuing the “set it and forget it” crowd. Instead of complicated programs, they are offering straightforward rewards: Use your credit card and receive a flat percentage rebated on your monthly statement.

Those cash back percentages are rising. One percent back used to be routine, but now several issuers offer a flat 1.5 percent back (Capital One Quicksilver, Chase Freedom Unlimited, Wells Fargo Cash Wise Visa, for instance).

Now 2 percent rates are becoming more common (Citi Double Cash, Fidelity Rewards Visa and credit union PenFed’s new Power Cash Visa, for example).

USAA last year started offering a card – in certain states – that can earn 2.5 percent back on all purchases.

“For the last couple of years, cash back has been growing in popularity, and it has a lot to do with the perceived ease of use around cash,” says Marc Bellanger, senior strategy director with Merkle, a marketing agency that works in the payments industry. “It’s easy to earn, easy to redeem and easy to understand.”

The new, more-generous offers often come with strings attached, however. Some require you maintain another account at the same institution, regular direct deposit or that you qualify for a limited-membership credit union.

CASH BACK CARDS WITH THE LARGEST FLAT REWARDS RATE
CardAnnual feeCash backDetails
USAA Limitless Cashback Rewards Visa$02.5%Not available in all states. Requires monthly direct deposit of $1,000 into checking account. Must be a USAA member: Open to current/former military and their families.
Fidelity Rewards Visa$02%Deposited in a Fidelity account.
Citi Double Cash$02%1 percent back on purchases, 1 percent back.
PenFed Power Cash Rewards Visa$02%With qualifying checking account or for former/current military members. Must be a member of credit union.

Bellanger says he thinks issuers will continue experimenting with ways to attract customers with cash back offers, given their popularity. The economics of credit cards, though, probably limit flat cash back cards from going much above 2 percent.

Instead, he says, consumers might see more innovation around staggering percentages in certain spending categories.

There may also be caps on how much cash back you can receive annually.

Citing industry data, Bellanger says that since 2013, offers for cash back cards have risen by one-third, to 40 percent of all offers, while cards with points-based rewards have fallen by one-third, to 25 percent of offers.

People prefer cash back
Polls show that people overwhelmingly prefer cash rewards to other rewards programs, by a ratio of 3-to-1. Rival programs, such as travel rewards, mostly target wealthier consumers and those with the highest credit scores. But cash back is more popular even in those segments.

Still, cash back is a category of reward cards that doesn’t seem too flashy, compared with travel reward cards that dangle perks such as huge sign-up bonuses, free trips, airport lounge passes and free hotel rooms. To maximize the value, though, some reward programs require understanding points-transfer rules and airline routings – details that can be time-consuming and challenging to master.

While travel reward cards typically charge annual fees, cash back cards usually don’t. Cash back cards also usually have meager or no sign-up bonuses.

A 2016 J.D. Power study found that more than 20 percent of credit card customers have a card that is poorly aligned with their spending habits and reward preferences. The mismatch is even higher – 44 percent – among people with airline cards.

Those findings suggest that in many cases, consumers might opt for a travel card because they like the idea of crisscrossing the globe with frequent flier miles, when in reality they might be financially better off with a simple-to-use cash back card.

“Oftentimes, consumers may be picking the reward type based on their aspirations,” says Tiffani Montez, senior analyst of card issuance with Aite Group, a financial services consulting firm. “It might not be a true reflection of how and where they spend their money.”

Once consumers have a credit card, many stick with it for the long term instead of keeping an eye on new offers. A February 2017 CreditCards.com poll also found a lot of inertia: 38 percent of cardholders said they had not changed credit cards in at least the past 10 years.

Challenges of airline cards
Deborah Goldberg, 39, of Charlotte, North Carolina, says she used to have two cards – a Discover it Cash Back card that offers 5 percent cash back on rotating categories each quarter on up to $1,500 in combined purchases (after activating) and 1 percent everywhere else; and a Bank of America Cash Rewards Visa that offers 3 percent back on gas, 2 percent on groceries and 1 percent on everything else. (There is a $2,500 quarterly limit on combined purchases for the Bank of America Cash card’s 2 and 3 percent categories; 1 percent thereafter.)

Then she added a Citi AAdvantage card to earn miles for a trip, but she says the American Airlines card takes a little work to figure out the rewards.

“I find it annoying that I have to analyze it to see what I actually have, as opposed to a straight cash back card,” she says.

She uses the Discover rewards to buy gift cards for movies or children’s clothing retailers. The Bank of America cash goes straight into her bank account, which earns a 10 percent bonus.

Cash back complexities
Even with cash back cards, there are different levels of complexity.

Some cash back cards offer bonuses for spending in certain fixed categories. Other cards offer 5 percent back in categories that rotate each quarter. And then there are the flat reward cards that offer a fixed percentage back, regardless of where the card is used.

Some consumers pursue a strategy of using multiple cards – say, using one card at stores where the card earns big category bonuses, combined with a second card that offers a high rate on all other purchases.

John Kelly, senior vice president of payment products and services for PenFed, says the credit union chose to introduce its cash back card in February 2017 after realizing that its customers wanted a straightforward rewards program.

Customers expect ease-of-use from their credit cards, he says, just as they find in other facets of life, such as calling Uber or ordering items on Amazon.

He said the card is exceeding expectations, even with minimal advertising.

“What works in this space is simplicity and being easy to understand. There are no ‘gotchas,’” he says. “What we are seeing in rewards, consistently, is that cash is king.”

See related:How to redeem your card’s cash back rewards, Best cash back cards, Cash back card reviews

 

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Published: March 7, 2017

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Credit Card Rate Report Updated: July 17th, 2019
Business
15.61%
Airline
17.59%
Cash Back
17.68%
Reward
17.58%
Student
17.79%

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