The following is a post by guest blogger Michael, who is the founder of CreditCardForum.com.
With the exception of a few specific categories of spending, nearly every credit card on the market gives rewards which are only equal to 1% or less. Many people assume this is the best they can do but the truth of the matter is they can get double that amount – at least a full 2% cash back – if they know how to play the game. Below is a straightforward, two-part approach for you to do so.
Part One: Get 2% on regular purchases
There are a few credit cards on the market that will give you a full 2% rebate, without any tiers or caps, on virtually every dollar you spend. Since the recession, the number of cards offering 2% have dwindled, but these five are still available:
Fidelity credit cards
There are 3 different cards offered by Fidelity which offer an unlimited 2% cash back without any tiers or caps. This rebate is deposited into the cardholder’s eligible Fidelity account, and hence, you must be a Fidelity client in order to qualify.
- Fidelity Retirement Rewards American Express Card
- Fidelity Investment Rewards American Express Card
- Fidelity Investments 529 College Rewards American Express Card
All three of these cash back credit cards have no annual fee and essentially operate the same way, but as their names imply, each has a specific purpose.
One caveat I would like to point out about the Retirement Rewards card is that the rebate which is deposited into your IRA will reportedly count against your annual tax-free contribution limits. For this reason, it may be wiser to have the rewards deposited into a Fidelity mySmart Cash or brokerage account.
Discover Escape card
Because this card is rarely advertised most people are not aware of it, which is shame, because in many ways it is Discover’s best credit card.
For a $60 annual fee, this card gives 2 miles per dollar spent without any caps or tiers. Each “mile” actually converts to a $0.01 value, which can be redeemed in the form of a statement credit to offset the cost of virtually any travel purchase made with the card. Although the $60 annual fee is a drawback, it does offer a number of benefits including primary rental car coverage, trip cancellation insurance, trip delay insurance, and more.
Capital One Venture card
This card is extremely similar to the Discover Escape – it has a $59 annual fee and gives 2 miles per dollar spent. Like the Escape, each “mile” is worth $0.01 that can be applied to a travel purchase. It is the only 2% card that I’ve actually seen advertised on TV (and probably a little bit too much lately).
Between the Capital One Venture and the Discover Escape, I choose to advertise the latter on my site. You can check out my review of the Capital One Venture card for a comparison to see why.
Part Two: Use card(s) that offer 3% on category spending
As we all know there are a plethora of credit cards on the market that give higher rebates on categories like gas, groceries, drugstores and many others. You should use at least one of these cards and then your 2% card on all other purchases – that way your average credit card rebate will be more than 2%.
What are the best cash back credit cards for category spending? Well to be honest, I do not believe there is a universal answer. It all depends on which categories you spend the most. Here are a few of the most popular ones that I hear about on Credit Card Forum:
Chase Freedom: This no annual fee card gives 5% on categories which change four times per year. In 2010, the spending that would earn 5% cash back was capped at $1,500 per quarter. It looks like that same cap will also be in place throughout 2011, but I can’t say that for sure because this program has been modified quite a few times during the past couple years. Here is my full review of the Chase Freedom.
Discover More: This operates in a similar manner as the Chase Freedom – you get 5% cash back on rotating categories. The drawback is that the 5% caps are usually lower and the spending on all other purchases is tiered. However what I really like about this card is that you can actually get more than 5% when you choose to redeem your cash back for gift cards – i.e. $40 in cash back will get you a $50 Ace Hardware gift card.
American Express Blue Cash: With this you will earn an unlimited 5% on groceries, gas and drugstores but only after your annual spending exceeds $6,500. Under that amount only earns you 1% in those categories and 0.5% on all other purchases. For some people, this no annual fee card is a smarter choice than the 2% cash back credit cards discussed above. Why? Because the Blue Cash gives an unlimited 1.5% on non-category purchases after you reach that $6,500 threshold. Depending on how much you spend on the aforementioned categories, it may be possible to average out with 2.5% or more over the course of a year.
PenFed Visa Platinum Cashback Rewards: Members of the Pentagon Federal Credit Union can get this no annual fee card which gives 5% for gas purchases without any caps. The only catch is that you need to pay at the pump (paying inside the gas station will only earn 1%).
Conclusion? It is quite easy to get at least 2% and if use a few of the best cash back credit cards strategically, it’s possible to achieve an average rebate that’s even higher. There are a number of members on my forum that have reported averaging out at nearly 3% annually!