Which cash back rewards credit cards are worth it?When I started my search for a cash back rewards credit card several months ago, there was a bevy of cards available, each seemingly offering something better than the next.
I ended up picking up a Chase Freedom rewards credit card, which offered 3% cash back in the 3 spending categories I used most, plus an additional $50 bonus cash back for every $200 in cash back earned. I paid off my credit card balance in full every month and benefited from thousands of dollars in rewards.
Now, due to the credit crunch, credit card companies have been tightening their purse strings. My Chase Freedom card is the latest victim. There are no more 3% bonus categories. Also, the $50 bonus when reaching $200 in cash back rewards is gone.
The bonus being nixed means my Chase Freedom card essentially becomes just like every other 1% cash back card out there. Thus, I set out on an adventure to find a new credit card that gave me better rewards.
Which Cash Back Rewards Credit Cards Are Worth It?
I looked at hundreds of cards before making a decision. Some of my criteria were:
- No AmEx or Discover. I had an AmEx card when I ran my hosting company. Although AmEx has great customer service, I was frustrated with the few places it was accepted. Discover has similar issues. As a merchant, I hated AmEx — they charged higher rates than Visa or Mastercard and their chargeback policy was asinine.
- More than 1% cash back. 1% is pretty easy to find everywhere, but I wanted a card that paid more than that.
- No restrictions on how to use the cash back. I don’t want to be limited to using my cash back at a certain store, hotel, or airline.
- No annual fee. This goes without saying.
Instead of making you wade through hundreds of credit cards, I will narrow it down to two cards for you. Both have a few caveats, but they are worth it.
PenFed (Pentagon Federal Credit Union) Visa Platinum Card
Highlights: 1.25% cash back; 2.99% balance transfer rate for the life of the balance transfer
Caveats: Must be a PenFed member. If you are not a military service member or government employee, you will need to pay $20 to join the National Military Family Association, and then you become eligible to become a PenFed member. After becoming a member, you will need to deposit $5 in a Regular Share account to open your credit card account.
Summary: My favorite thing about PenFed is its great rates on pretty much everything. They offer mortgages, auto loans (at 3.99%!), and a 5-year CD that pays 4% APY (as of this writing.) Their Visa card is a great deal, too; it offers 5% cash back on gas, 2% at the supermarket, and 1.25% cash back on everything else. The cash rewards are simply credited to your account at the end of the month; you don’t have to request them. It’s definitely worth the $20 one-time fee to sign up with them. I am even considering refinancing my auto loan into PenFed so I pay less every month.
The application process is straightforward, albeit a bit strange if you are not a government or military employee. First, you establish your account and pay $20 for a one-year membership in the National Military Family Association. (You do not need to pay more than the $20 for a 1-year membership to retain membership in PenFed!) This is tax-deductible, so make a note of it for tax purposes. Once that’s done, go through the steps to set up your PenFed account.
PenFed will send you a form in the mail that you then sign and return to them in the postage-paid envelope provided. With the customer number you received in the mail, set up your online account and apply for the credit card. The customer service rep I talked to says that due to their 2.9% balance transfer promotion, it takes a few days to get an account approved. Their customer service was friendly and helpful — an encouraging sign. I am currently waiting for my account to be approved.
Find out more or apply for about the Pentagon Federal Credit Union Visa card.
Since I had already dinged my credit with one account offer, I decided to go for another credit card as well. (It’s always best to apply for multiple credit cards at once so you don’t have inquiries every few months on your credit report.) I chose the Schwab Invest First Visa card.
Schwab Invest First Cash Back Credit Card
Highlights: 2% cash back on everything; 2.99% balance transfer offer for 6 months
Caveats: Must open a Schwab investment account, which has a $1000 minimum (or $100/month automatic transfer). Cash back will be deposited into your Schwab account, which you can then invest, write a check on, or withdraw with a debit card.
Summary: This is a great card for those who want to invest online. I love the idea of investing credit card rewards, since I am a huge fan of my money making me more money! Schwab charges a $12.95 fee for each trade made with your account ($8.95 if you have over $1 million in liquid assets or make more than 30 trades per quarter.) You can buy CDs, stocks, mutual funds, or bonds with your Schwab account.
To apply for the card, you must first open a brokerage account. The online form will take a few minutes to fill out; you’ll need your driver’s license number. During the account setup process, you have the option to transfer a brokerage account from another broker. I have an OptionsXpress account that charges me more per trade, so I opted to move that to Schwab.
Once your brokerage account is set up, apply for the credit card. Schwab says it will approve most accounts in 7-10 days. I am currently waiting for approval.
Find out more or apply for a Schwab Invest First Cash Back credit card.
Which Cash Back Rewards Credit Card Is Better?
The difference between 1% and 2% cash back is $100 for every $10,000 you spend, so it can be well worth investing an hour or two to make the change. As for which card is better, that’s up to you. As an investor, I will probably use the Schwab card more, but your needs may be different. Of course, there are many other cash back rewards credit cards to choose from.
Making The Change Painless: Four Tips
It can be a pain to transfer from one card to another. Here are four quick tips to help make your credit card transition less painful:
- Set all payment due dates to the same day. When you get your new card, the first thing you should do is call your credit card company and have them switch the due date to the same date as your current credit card has. That will mean it’s much less likely to go past-due accidentally. Do this for all of your credit cards — even store cards — for a totally painless process.
- Set up online banking and link your checking account right away. Some credit cards can be really annoying to link to your checking account, so do this right after you change your due date. That way you don’t have to send a check in the mail — another safeguard so you don’t miss a due date.
- Make a list of all automatic bill payments on your current card, and change them over all at once. This should take somewhere between 30 and 60 minutes. it should be straightforward. If you miss one, no big deal — just catch it next month.
- Finally, don’t forget to cash out any remaining rewards on your old card. Do this preferably after you have an entire billing cycle with no more charges.
Cash back rewards credit cards are an easy way to keep your money working for you!
Recommended Reading:
- Cash back rewards credit cards. Here’s a huge list of rewards credit cards — and you may even get paid to sign up for them!
- Make money lending your spare change. Over 40 other erica.biz readers have already signed up for Lending Club and received $25…don’t miss out!
- What’s the best way to invest money during an economic downturn? I examine various ways to invest your money, from the stock market to housing, from the perspective of the current crash.
- Don’t forget to budget. Your goal should be to pay your credit cards off in full every month, and let the credit card companies pay you, instead of the other way around.
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13. May 2009 at 11:51 am
This is a very nice writeup. If Chase indeed cuts the rewards for Freedom card to 1%, I will have to use my Fidelity 529 College Rewards card exclusive. I got the card when it still gave 2% cashback on every purchase. The newer version only has 1.5%. Cards with good rewards are rare these days.
13. May 2009 at 1:35 pm
Why does no annual fee go without saying? If there’s a fee of, say, $50 but a higher cashback percentage that (based on your spending history) going to get you several hundred dollars more in cashback, then isn’t it a sound business decision to pay the fee? (Now, whether there is such a card is another question — if there’s no card with a fee that has more cashback than your no-fee cards then I’d ignore them).
13. May 2009 at 2:30 pm
I like the Costco TrueEarnings card. It’s an American Express, so there are places where it’s not accepted, but it gives you 5% cash back on gas, 3% on eating out, and 1% every where else. I’m not opposed to owning more than one card, so I have no problem using different cards for different types of purchases. And the annual fee is waived if you have a Costco membership.
13. May 2009 at 4:11 pm
@Sun: Thanks. The 2% cards are becoming harder to find these days, and many of them have restrictions. It just depends on which restrictions are worth it for you.
@Winston: Totally agree, but surprisingly, the cards with annual fees aren’t any better.
For business (which is probably worth another writeup since that was another two hours of research), I will probably go with Southwest’s card, which has a small annual fee. I even calculated the exact dollar amount your free ticket would have to be worth to make it worth it to use the card (it’s about $225 assuming you earn one a year.)
@Creditnet: I like the Costco card too, and should I wish to have an American Express card, it would probably be my first pick. You can find it at http://erica.biz/go/creditcards under Reward Credit Cards — and there’s a deal where you may be able to earn $40 just for applying.
Thanks!
-Erica
14. May 2009 at 3:50 am
It is great that you’ve done the research to find these deals. My credit card pays a flat 1%, and I thought that was something special until I read this article.
I have a negative opinion overall of this segment of the banking industry. Cards charge hefty merchant fees, and then card users must shop around to find a card that gives them most of the merchant fee back. The very product of a credit card has no advantage over a debit card and a traditional bank loan except that credit cards let people get into debt by accident.
I also wonder about the 3.99% auto loan. Since you can’t get 3.99% after-tax guaranteed return on cash these days, what good is it to borrow money on a car? It just makes life complicated and takes time away from doing real business.
My opinion of thinking about how your actions affect your credit score is about the same. The important thing is to earn money. Who cares what banks’ opinion of you is?
Many financial products work that way. If you heard about first as an adult after doing business without them, they’d just sound like a pain and a distraction from business.
17. May 2009 at 9:43 pm
Hi Charles,
re: borrowing money on a car — I have the money in a savings account. Since I’m moving soon, I want to keep a lot of liquid cash on hand. Hence, have not paid off my car loan.
Agreed on hefty merchant fees. AmEx is the worst when it comes to merchant fees. Highway robbery. I have horror stories about their merchant side. I understand why so few places take AmEx.
-Erica
19. May 2009 at 6:27 am
Why create a second job tracking all these gimmicks with credit cards? Most people just don’t have the bandwidth to do it.
People spend 15% or more with credit than cash – more debts. And according to consumer groups who track these things, over 80% of these rewards go unused.
Here’s a better idea: don’t use debt. Save and use cash.
WOW! How can I say that? Am I unAmerican? But I want it NOW!
No. American does not mean racking up large debts buying stuff with debt, to keep the credit card companies in business with their shady practices, high interest rates, and surprise fees.
How do I know? They screwed me. I have a Citicard that was at 12.9% and have made all my payments on time for several years. Last month, it jumped at their discretion and not at anything I did, to 19.99%. I have paid it off and am on my way to being completely debt free very soon.
That means: NO PAYMENTS! I will have cash.
Americans have GOT to stop playing these games with their money – the stupid rewards – aren’t. For every one of you who can “handle” paying off your debts, there are 99 who don’t – haven’t you read the news talking about the consumer credit crisis and negative saving rates?
Or is it the “not me” syndrome at work?
29. May 2009 at 7:27 am
I agree with Charles, the monopoly banks have on credit cards is pretty impressive. Making the merchant pay the fees is a way to hide the expense from the customer. If the customer paid the expense directly competition could drive costs down.
It’s the same way with inflation (banks again with government bailouts and handouts) which is really just taxes in disguise. If they tried to tax us directly what they take in inflation there would be more people realize it and more TEA parties.
1. June 2009 at 11:28 am
@Michael F: I’m with you, my friend. I’ve spent the last 5 years without a credit card, or any other loan, with the exception of real estate. I love the debit free life.
My job requires me to travel, a lot. I work for a very stable institution, (state-government), who reimburses me within 1-2 weeks of submission. I’ve funneled over $30,000 through my “debit card” account in the last year, and life has gone on. I don’t really plan on making my millions via “rewards”.
HOWEVER…
When I use my debit card for hotels and car rentals and have been getting killed by “holding” cost. They charge up to $250 holds on my account and can take weeks to release them. Rental car companies treat me like a 3rd class citizen, making me show flight times, and hotel reservations, or submit to a credit check, each time I rent! The final straw came last week when I had nearly $1500 in holds on my account at one time!
My brother has been a PenFed holder for about 2 years. So I took his advice and applied today. In my follow up research I found this site. Nice to know someone as sharp as Erica did her homework found it to be a good option! Thanks for the recommendation!
FYI… PenFed is giving 5% back on air travel, up to the first $4000 each month, for a limited time.
1. June 2009 at 2:07 pm
This is an interesting article. My husband and I use Chase Rewards (gas and groceries) and Chase Freedom (everything else) and pay them off every month. I called him at work – he said he checked the accounts a couple weeks ago and we still had the 3% and $50 bonus. Thanks for writing this; we’ll be checking all the rewards details later to see what’s changed. And by the way… I HATE how the credit card companies can just change the APRs and rewards on a whim, leaving us to figure out what changes they’ve made.
9. July 2009 at 4:52 am
Hi,
This is your second effort to start new business.But really you have done well
7. September 2009 at 1:03 am
hi, great article. are both of the cards mentioned business credit cards? i have a hard time finding a good business credit card that pays more than 1%. i’ve been looking at the amex plum card, but hate the fact that there is an annual fee after the first year.