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The different kinds of cash back credit cards

The different kinds of cash back credit cards

Posted on: April 14, 2013
Author: Staff

Cash back credit cards are becoming increasingly popular in Alberta. With over 20 types of cash back cards available in Canada, it can be hard to understand the different rewards structures—and figure out which card is best for you.

Here is a summary of the different ways cash back cards can be structured:

Tiers

With a tiered cash back credit card, your cash back earning level is tied to how much you spend on your card. For example, you may earn 0.5% on the first $5000 you spend, 0.75% on the next $5000, and 1% on the rest.

This kind of structure is often marketed as "up to 1% cash back" and is common with no-fee cash back cards.

Is a tiered card right for you?

If you're sure you'll hit the 1% earning target, then a no-fee tiered card may be worthwhile. But if you don't put that minimum amount on your card, you'll earn very little cash back with this kind of card.

Spending caps

Whereas tiered cards benefit people who spend more than a certain amount, spending cap cards benefit those who spend less than a certain amount. Usually these limits are pretty reasonable and not very hard to hit, but sometimes you'll see cards that offer 2,3, and even 4% back up to a maximum of $20,000 a year or so. At that point, the earning rate usually drops down to something much smaller (around 1%).

Is a spending cap card right for you?

If you're a moderate spender, the spending cap probably won't be an issue. But if you put big dollars on your card every month, you may max out your spending and drop down to a lower rebate rate—not ideal if you want to maximize your cash back.

Max rebates

Similar to a spending cap card, a max rebate card will limit the cash back you can earn in a year—usually to around $500 or $1000. When you hit that rebate limit, you stop earning cash back on your purchases.

Is a max rebate card right for you?

Think about your annual credit card spending and see how much of a rebate you'll get with this card. If you're below or close to the max rebate limit, this kind of card may be good for you. If you're a big spender and are likely to go over the rebate limit, a no-limit card is a better choice because it will put more money in your pocket at the end of the year.

Different rates at different types of stores

With these kinds of cards, your rate depends on where you make a purchase: you'll typically earn more for "everyday" purchases (like gas, groceries, and, with one ATB card, home improvement) than you will for others. Your credit card company knows where you made a purchase based on the business' merchant code—a grocery store code is different from that of a gas station, airline, or restaurant.

It's not a fool-proof system, however. The individual stores are responsible for what type of merchant code they use, so occasionally stores are misclassified and you don't get the cash back you think you're getting. A classic example is Walmart: they are generally classified as department stores despite the fact that they sell groceries. In the US, they tend to be classified as grocery stores, providing more cash back.

Is a store-specific rebate card right for you?

If you use your credit card to buy groceries, gas, and other staples every week, you can multiply your cash back by using one of these cards. On the other hand, if you use your card for "fun" stuff—like restaurants, clothing, or flights—you probably won't benefit from the higher rate.

Annual fees

Some cards have them, some don't. In most cases, the cards with the higher cash back rates have higher annual fees.

Is it worth the annual fee?

Add up how much you usually put on your card in a year, and then calculate what your cash back would be. If your cash back won't cover the fee (or barely covers it), then it's better to go with a no-fee card—preferably one with at least 1% cash back.

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