If you're curious about how to make your daily spending work for you – you're in the right place. Cash back credit cards offer a simple yet effective way to earn money back on your everyday purchases.
Whether you're a seasoned credit card user or new to the game, we're here to help you get the most out of your cash back cards. Let's dive in so you can start earning rewards on your credit cards and redeeming cash back.
What is cash back on a credit card?
Cash back credit cards offer a straightforward way to earn money on purchases you're already making. If you're wondering, "Are cash back cards worth it?" – it depends on how you use it. When you get a cash back card, you're signing up for a credit card that rewards you with cash, which is typically easier to understand than a points system.
Every time you use your cash back card, you earn a percentage of your spending as cash back. The exact percentage varies depending on the specific card and the type of purchase you make. Some cards offer a flat rate on purchases, while others provide higher percentages for particular categories like groceries, gas, or dining out. Each month, you'll receive a statement that details your spending and how much cash back you've earned.
If you want to enjoy cash back rewards but are wary of using credit, check out KOHO's selection of prepaid credit cards. With a prepaid credit card, you don't need to worry about interest charges or accumulating debt. KOHO offers three different account tiers – Easy, Essential and Extra – with unique benefits and cash back options, like up to 2% cashback on groceries and transportation.
Ways to redeem cash back
Most credit cards offer a few options for cashing in your cash back rewards. The most common ways to redeem cash back are:
A statement credit
A statement credit means you'll get money credited to your credit card account, which reduces your card balance. For example, if you spent $1,000 with a card offering 1.5% percent cash back, you'd earn $15 in cash back rewards, lowering your balance to $985.
A direct deposit to a bank account or cheque
Certain programs will let you redeem your cash back as an actual cheque or have it deposited directly into your bank account. This gives you more flexibility since you can spend or save your rewards without being tied to a particular card account. Most cards require a minimum cash back amount to meet before redeeming.
Many cards allow you to set up automatic cash back redemption. Your cash back is either distributed at scheduled times or when you reach a specific cash back earnings amount.
Redeem for travel, gift cards, or merchandise
Most credit card issuers offer ways to redeem your cash back for online shopping, gift cards to various retailers, restaurants, video streaming services, and more depending on the issuer.
Pros of cash back cards
There’s a reason why cash back credit cards are extremely popular in Canada. Here are the top five advantages.
Earning cash back on everyday spending
The greatest pro of a cash back credit card is the opportunity to earn money back on your everyday expenses. Whether buying groceries, filling up your gas tank, dining out, or shopping online, you can earn cash back rewards with each purchase. This can help you offset the cost of your regular spending, effectively reducing your overall expenses.
Flexibility in reward redemption
Cash back rewards are highly flexible in how you can use them. You can typically redeem your cash back in a number of ways, allowing you to tailor your rewards to your specific needs. Whether you'll use your cash back to reduce debt, splurge on a big purchase, or enjoy a night out – the choice is yours!
Simple and transparent
Cash back credit cards are known for their easy-to-understand structures. Compared to other rewards cards, there are no complex point systems or blackout dates to worry about. This simplicity makes it easy to understand how your rewards accumulate and how to use them effectively.
Protection and additional benefits
Many cash back credit cards come with additional benefits, such as purchase protection, extended warranties, and rental car insurance. These perks can provide valuable security and savings on purchases and travel expenses. Some cash back cards also offer introductory 0% APR periods on balance transfers or purchases, helping you save on interest if you carry a balance.
Building credit history
Using a cash back credit card responsibly and making timely payments can positively impact your credit history. A strong credit history can open doors to better financial opportunities, such as lower interest rates on loans, higher credit limits, and an easier approval process for a mortgage.
Cons of cash back cards
While cash back credit cards in Canada have their advantages, they also come with some potential drawbacks. Here are a few things to consider:
Higher interest rates
Cash back cards often have higher interest rates compared to basic credit cards. If you carry a balance from month to month, the interest charges can quickly offset the cash back rewards you earn. For example, the average credit card has an APR of 19.99%-25.99% in Canada. If you carry a balance month to month of $1,000 on your card and it has an APR of 23.99%, you'd be paying about $20 dollars in interest monthly, or $240 yearly. If you carry a balance, even sometimes, you should prioritize the interest rate first.
Many cash back credit cards charge annual fees, so you'll want to ensure your potential earnings justify the cost of the card. For example, if you spend $467 collectively on groceries, restaurants, and transportation over the month, the KOHO Extra prepaid Mastercard® pays for itself.
Limited redemption options
Cash back cards may have limited redemption options compared to other types of rewards cards. You're typically limited to statement credits, direct deposits, gift cards, or merchandise. If you prefer rewards like airline miles or hotel points, a different type of rewards card may be a better choice for you.
Common restrictions on cash back rewards
Although cash back rewards are generally more flexible than other rewards programs, there are still some restrictions when it comes to accessing your rewards.
Category spending limits
Some cash back credit cards have spending limits or caps on specific bonus categories. For example, a card may offer higher cash back rates for purchases in categories like groceries, gas, or dining, but once you reach a certain spending threshold in these categories, you may earn a lower cash back rate or no rewards at all.
Minimum redemption amounts
Most cash back cards have minimum redemption amounts, which can be frustrating if you're eager to access your rewards sooner rather than later.
Minimum income requirements
Some cash back credit cards need you to meet a minimum income requirement. It's meant to protect the lender to ensure you can handle credit responsibly and make your payments.
What is a good earning rate on cash back?
Generally, a cash back rate of 1% on all purchases is considered good for cash back cards. So, if you're wondering, "Is 1% cash back good?" – the answer is yes. But other cards have higher percentage rates, particularly in specific spending categories like groceries, gas, dining, or travel. Those category-specific rates can range from 2%-5%, so a card tailored to those categories may offer better value if you spend heavily in categories with higher cash back rates.
Are cash back cards worth it?
The short answer is it depends on your financial situation and how the specific card aligns with how you spend your money and your goals. Cash back cards can be highly rewarding but come with certain restrictions and potential pitfalls.
You can make the card work in your favour by using them responsibly, tracking your spending, and paying your balance in full each month to avoid interest. Ultimately, the decision is yours – but it's important to see what new products and services are available on the market.
If you're searching for a new cash back card, KOHO has you covered with 1% cash back on groceries, transportation, and up to 2% cash back on select plans.