Are Cash Back Credit Cards Worth It?

Most Canadians likely have a credit card in their wallets. It gives you easy access to credit, helps build your credit score, and can reward you with incentives. Whether you're going out on a weekday with friends or need to pay bills, a credit card comes in handy and can make your life easier when you're out and about.

With many credit card options, how do you know one is the best for you? Most credit cards have features that give you perks and bonuses for spending money. For example, you may see credit cards that offer points you can redeem for cash back earnings for merchandise, travel purchases, gas, and more. One of the most common perks offered is cash back rewards.

While cash back may seem like free money, it's a reward for purchases in specific categories. Before you sign up for a cash back card, you should understand how cash back cards work to help you evaluate if it's the right card for you and maximize the money you earn from everyday purchases.

What is a cash back credit card?

A cash back card is a credit card that rewards cardholders a percentage of the amount paid. For example, if you paid $400 on groceries with a credit card that earns 1.5% cash back, you earn $6 in cash back rewards. The credit card company issues the cash back rewards at the end of the billing cycle, and you can redeem it as a deposit, statement credit, gift card, or cheque. Some financial providers offer other redemption options as well.

Cash back cards can range in complexity depending on the provider. Some financial providers offer a flat rate across all purchases. For example, you'll earn the same in cash back regardless of whether you buy groceries or gas, eat at restaurants, or use streaming services. Other cash back cards offer tiered rewards based on the purchase category. For example, you may earn 3% cash back for gas and grocery purchases, 2% for dining out, and 1% for all other purchases.

Common cash back bonus categories

Some credit card companies offer a higher cash back reward when you make purchases in specific categories. The most common bonus categories include gas, groceries, dining out, and entertainment. You may also see bonus rewards for streaming and food delivery services, drugstores, internet and phone services, and specific retailers. Depending on your credit card, you may be able to choose which categories you want to earn bonus rewards in based on your spending habits.

What is a rewards credit card?

A rewards card is a credit card that typically offers points or travel rewards when you spend money. You can use the points to redeem specific items or get perks like discounted flights, hotels, and car rentals or lower foreign transaction fees. Many credit card companies offer rewards to incentivize cardholders to spend money. It's important to pay your credit card balance on time every month, or you may have more interest payments than the credit card rewards earned.

Pros of a cash back card

No annual fee

Cash back cards typically have no annual fees required to, which means you don't have to pay to own the card. You don't have to use your rewards to pay a credit card fee.

Even if you have a different preferred card, you can keep your cash back card open for free for as long as you want. Having a longer credit history also improves your credit score, which helps you secure more credit in the future.

However, not all credit card companies offer no annual fees. Some companies have an annual fee rebate, but it's best to confirm with your credit card company.

Sign up bonus

Most cash back credit cards offer bonus rewards when you sign up, such as additional cash back earnings for a short period. For example, a credit card company may have a bonus 5% cash back reward if you spend $5,000 in the first three months. The welcome offer is how credit card companies encourage cardholders to spend more money, as the bonus cash back rewards can add up to a few hundred dollars.

Shopping perks

Like many credit cards, cash back rewards may offer shopping perks to safeguard your purchases or help you save money. For example, you may get extended warranties, price matches, mobile device insurance, and more. These perks vary depending on the credit card issuer, so it's best to research the specific breakdown of your perks.

Cons of cash back credit cards

Foreign transaction fees

A cash back card is likely not a travel rewards credit card, which means you'll most likely pay a foreign transaction fee whenever you're travelling abroad. A foreign transaction fee is a charge by the credit card company for every purchase made outside your home country. You may also be charged a fee if you make an online purchase in a different currency. Fees vary depending on the credit card's terms and conditions but can range from 2.5% to 3% of the purchase price typically.

Earning limits

Cash back cards can have a limit on the amount of cash rewards you get in your bank account. While some cards let you earn unlimited rewards, most cards have a cap on the amount of cash you can receive for regular and bonus purchase categories. Check with your credit card issuer whether they have limits on how much cash you can get.

No travel rewards

Some cash back cards offer travel incentives or give you the option to redeem your rewards for cash back or travel perks. However, if you want to earn travel rewards specifically, you'll likely have better luck with a points reward or a travel credit card. If you want to transfer points to a hotel or airline partner, get airport lounge access, find travel insurance deals, and get luggage protection, you'll probably prefer a travel rewards card instead of a cash back card.

Cash back vs. rewards points: Which is worth more?

Choosing between cash back and rewards credit cards can be tough. Cash back earnings can help offset some of the money you spend, but rewards points can give you perks when making purchases or travelling abroad. Here are some things to consider when deciding between a cash back vs. points card.

Your spending habits

If you spend a lot of money on everyday purchases, like groceries, shopping, gas, streaming services, gym memberships, and recurring bill payments, a cash back credit card can help you earn some statement credits to lower your monthly statements. Grocery store cash back credit card rewards are a great choice if you're looking to reduce some of the financial burden of increasing food costs. A cash back credit is especially rewarding if you frequently make purchases in popular categories, like gas and groceries. Some credit cards let you choose the categories where you earn bonus rewards based on your purchases.

Your lifestyle

Are you an avid traveller or want to save some money every day? If you're always going somewhere new, you'll likely get more benefits from a travel rewards credit card. There are several types of travel cards, like hotel credit cards, airline cards, or flexible travel cards, you can use to redeem any travel and accommodation. Many credit cards partner with airlines to offer additional bonus points you can use on the airline's website.

If you have no interest in getting travel rewards or redeeming points, you can go the cash back credit card route. Simply spend money on your everyday purchases and earn extra cash along the way. You can cash in your rewards towards paying off your credit card bill or use it to buy something you want.

Value of your points

Knowing the value of your rewards makes a difference when deciding between cash back and rewards cards. It's straightforward to estimate how much money you can earn in cash back rewards each year. All you need to do is multiply the cash back rewards percentage by your estimated or average yearly expense total. Figuring out the value of your rewards points can be trickier, as you may earn 1 point for every few dollars spent. Certain rewards fluctuate in price, like hotels and plane tickets, so you may not always get the same value for a single redemption using a points system.

Welcome bonus

Both cash back and travel rewards cards may offer welcome bonuses. Points cards typically offer between 20,000 and 75,000 bonus points, which can be worth $200 to $1,000, depending on how you redeem the points. However, the credit card company usually requires you to spend a minimum amount of money within a specified period. For example, they may offer you 50,000 bonus points if you spend $5,000 within the first 90 days of opening your account.

Similarly, cash back cards typically offer a higher reward rate for the first few months. For example, you may earn a 10% cash back bonus for the first three months of the card membership. There are usually restrictions that cap your bonus earnings.

What credit score do you need for a cash back credit card?

Like all credit cards, you likely need a certain credit score to get approved for a cash back credit card. A good credit score, 660 or above, generally qualifies you for most cash back and rewards cards available. The specific credit rating required depends on the credit card issuer. If you don't have a good credit rating, you can look into cards that approve people with bad or fair ratings. A prepaid or secured credit card can be a good option to consider if you have a lower credit score.

Different types of cash back credit cards

Understanding the different types of cash back credit cards available can help you make an educated choice about which one to open. Common rewards you may see across all cash back cards include a tiered or flat rate cash back system, sign-up bonuses, bonus rewards categories, insurance, and no annual fees. Some cards offer bonus rewards for your birthday and points redemption for travel. However, there may be restrictions like income requirements, limited redemption options, yearly cash rewards payments, and low monthly caps on bonus categories.

How to choose a cash back credit card in Canada

The best way to choose a cash back credit card is to compare different options and thoroughly understand the pros and cons of each one. The goal is to maximize the value of your rewards and find a card that matches your spending patterns. If you primarily buy groceries, consider a grocery credit card. If you have mostly entertainment or gas purchases, look for a card that rewards you well in those categories. You can use a credit card comparison tool to compare your earnings across different categories based on your monthly spending.

Here are some things to consider when choosing a cash back card to add to your wallet.

Annual fee

Most cash back cards have no annual fees, but that's not always the case. Decide whether you want to pay an annual fee. Some cards with annual fees may offer better perks, like travel insurance. Some benefits are cheaper with your credit card than purchasing it individually. The rewards you get from the credit card may be worth the annual fee required, but that's up to you to decide. You can also ask the card issuer if they offer an annual fee rebate.

Interest rates

All credit cards have associated interest rates charged if you don't pay your statement on time. If you anticipate carrying a balance from time to time, it may be beneficial to consider a credit card with low, permanent interest rates. Not all low-interest credit cards offer rewards, so it's a good idea to do your research to look at the options available.

Bonus categories

Most cash back rewards cards have a tiered system instead of a flat rate. You may earn higher rewards in certain categories compared to your other purchases. Try to find a card with bonus categories that match where you spend your money. If you'd rather deal with one cash back rate, look for a card with a high percentage everywhere.

Do I have to opt in to start earning cash back?

If you have a cash back credit card, you automatically start earning rewards when you spend money on eligible purchases. The amount you earn depends on the cash back rate and the amount of money you spend. The more money you spend, the more cash back earnings you get. Some credit cards have limits on the maximum amount of cash back you can earn.

Some companies offer statement credits, gift cards, or cash, while others offer only a few options. It's also important to note the frequency of redemption. In most cases, you can redeem your cash back rewards anytime. However, some cards only offer yearly redemptions, so you'll have to wait until the end of the year to get your cash back.

How to maximize credit card cash back rewards

Watch out for fees

In addition to potential annual fees, there may be other costs associated with your cash back credit card. For example, there's a foreign transaction fee when making purchases in foreign countries, which means it'll cost you extra. If you're paying a lot of fees each month for your credit cards, it'll eventually cancel out the rewards you earn from cash back and points.

Don't carry a balance

If you carry a balance on your credit card, you'll face interest charges, which means paying extra money. Interest charges can quickly add up to more than your cash back rewards, especially if you have high-interest rates or multiple credit cards. Try to limit your credit utilization ratio and make purchases with your credit card that you know you can pay back.

Are credit card rewards taxable?

You may be wondering if cash back credit cards are taxable, after all, you get a small portion of your spending back whenever you make purchases. The majority of credit card rewards aren't considered taxable income and, therefore, aren't subject to taxes. If you're making personal expenses, like rent, mortgage, and clothes, you probably don't have to worry about claiming these rewards on your tax forms.

Earning cash back with KOHO

You can earn rewards with a KOHO virtual credit card, giving you the convenience to spend responsibly without reaching for your wallet. There's no waiting or credit checks, so you get guaranteed approval for instant spending and earning cash back for every dollar. For emergencies, overdraft protection coverage has you covered if your balance is running low. You can get up to $250 in coverage with zero interest.

Looking to improve your overall financial health? KOHO offers many helpful tips to help you build a strong foundation. Build your credit with KOHO using a secured line of credit, a KOHO line of credit, or both. Stay up-to-date with your credit rating with a free credit score report to ensure you stay on track of your goals and financial well-being. A good credit score can get you lower interest rates on loans, an easier approval process for a mortgage, and more cost savings. If you're looking to earn interest, KOHO also has you covered with the High-Interest Savings account.

Get started with KOHO today to earn cash back and other great rewards.