Understand the different types of cash rebate credit cards

A Look at the Different Types of Cash Rebate Credit Cards

Understanding the different types of cash rebate credit cards is essential if you are to choose the right cash back credit card

Many cardholders are beginning to realize that in most instances, cash rebate credit cards offer better value than reward credit cards because you get your reward in the form of "cash". In the past, a basic cash back credit card would just pay a typical 1% cash rebate for every dollar that you spend on your credit card. Things have gotten a little more competitive now in the credit card world and there quite a few variety of cash back credit cards.

In this article, we explore the various types of cash rebate credit card in details. By the end of the article, you should have an understanding of the different types and hopefully have an idea of which type would suit you better.

Basic 1% cash rebate credit card

Basic cash rebate credit cards pay 1% cash rebates for every dollar that you spend on your card. This is the normal rebate percentage for both cash back and reward credit cards. In the old days, basic 1% cash rebate cards were a better alternative than reward credit cards because they tend to have no annual fee (versus a typical reward credit card). The HSBC MasterCard with Cash Back Rewards is an example of a basic 1% cash back credit card.

5% cash rebate credit card

Consumers have it much better these days. American Express was the first card company to come up with the "everyday purchase" category in their charge cards. They paid two membership reward points for every dollar that was spent on "everyday purchases" rather than the usual one point. They defined "everyday purchase" items as purchases made from standalone supermarkets, gas stations and drugstores.

Citibank upped the ante in the cash back segment by introducing the Citi®Dividend Platinum Select® Card that paid 5% rebate on every dollar spent on 'everyday purchases". You get a 1% rebate on "other purchases". This has become one of the most popular card around.

These 5% cash rebates have made many standalone gasoline credit cards "obsolete". There are still many gasoline credit cards that pay less 5% rebates on on gasoline purchases. At present, there are no standalone supermarket or drugstore credit cards that pay 5% rebates. Hence, these 5% rebate cards should be a core holding for anyone looking to earn cash rebates from their credit cards.

Update (Aug 2006) - The Citi Dividend Platinum Select Card is no longer offered by Citi.

Hybrid Cash Back Reward credit card

There has been a growth of hybrid reward credit cards that allow cardholders to either use their "reward points" for rewards or to redeem for cash rebates. Traditional reward programs like the American Express Membership Reward program and the Citi ThankYou Redemption Network allow cardholders to exchange points for cash rebates. However, the rebate percentage is less than 1%. However, new cards like the HSBC MasterCard with Cash or Fly Rewards is an example of such hybrid cards. These cards will appeal to those who like to redeem their reward points for a free airline ticket but want the flexibility to redeem for cash rebates also. This option is valuable because it normally takes about 25,000 points to get a roundtrip ticket within the continental US. If your ticket cost exactly $250, then using 25,000 points or miles is equivalent to getting a 1% rebate. However, if your ticket cost more than $250, using 25,000 points means that you actually got more than a 1% rebate from your reward points. However, if your ticket cost only $150, then using 25,000 points makes less sense. Instead, using 15,000 points and exchanging them for cash rebate is a better use of reward points.

Tiered Cash Back Credit card

There used to be more tiered cash back credit cards, but there numbers are dwindling because they are becoming less popular, especially with the presence of 5% cash back credit cards. Tiered cash rebate cards pay a lesser rebate percentage when your annual spending is below a certain threshold. Once your annual spending crosses above the threshold, you will earn a higher rebate percentage. The best way to illustrate this is with an example. We shall use the Blue Cash from American Express.

For annual spending below $6,500, the Blue Cash pays a 1% rebate for "everyday purchases" and 0.5% for "other purchases". Once your annual spending exceeds the $6,500 threshold, you get 5% and 1.5% rebate respectively. In fact, you could say that the Blue Cash is a tiered 5% cash back credit card. Why would credit card company want to impose a tiered rebate structure and complicate rebate calculations for the consumer? The reason is that 5% cash rebate cards are not as profitable for credit card issuers because they are paying 5% rebates. Furthermore, most cash rebate cards have no annual fee!. A tiered rebate formula is one way credit card issuers to maintain or increase profitability of their cards. But with the presence of 5% rebate credit cards, issuers has to offer something extra. And that something else that the Blue Cash from American Express is offering is a 5% rebate on "everyday purchases" and also 1.5% rebate on "other purchases" (once spending exceed threshold). This 1.5% rebate on "other purchases" is higher than the typical 1% rebate that you get with most other cards.

Hybrid Tiered Cash Back Reward Credit card

If there was any confusing hybrid credit card, it has to be Discover Cards. To start off, it has a tiered rebate formula which frankly speaking is not very attractive. For annual spending less than $3,000, you get less than 1% rebate! Once your spending exceeds $3,000, you can earn 1% rebate. If that is all the Discover card have, nobody would want it since any basic cash rebate credit card pays a 1% rebate (at the minimum). To make their cards more attractive, Discover has added two interesting features. Firstly, they have a select group of partner merchants which they collectively call "Get More partners". If you use a Discover® Platinum Card when purchasing with these partners, you get a 5% rebate. To make their card more enticing, Discover also allow cardholders to double their value in their cash rebate if they choose to redeem their cash rebates for gift certificates of select merchant partners rather than redeem it for cash.

Conclusion

That's it. These are the different types of cash back credit cards available to consumers today. I left out describing business cash rebate credit cards because they have their own little unique characteristics, which we shall explore in another article. By looking at your spending patterns, and understanding the different types of cash rebate credit cards available, you should be able to choose the best cash back credit card for yourself.



See our other article on How to combine cash rebate credit cards to earn maximum rebates?