Building Your Credit Card Portfolio: Lesson 1: Cash Back cards

Over the next few weeks, I will be writing a series of articles which is designed to help you personalize your credit card portfolio for maximum return.  There are dozens of credit cards out there, and some are far better for you than others.  Here is a list of topics we will be covering:

  1. Cash back cards
  2. Airline credit cards
  3. Hotel credit cards
  4. Flexible reward credit cards
  5. Cards which provide the best bonus categories
  6. Cards which provide the best benefits

Obviously I hope you find value in these articles, but the one thing I want you to keep in mind is that there is no one magic, silver bullet credit card for anyone.  The people earning the most in return on their spending are the ones who carry a handful of cards and use the right card at the right time and place.  And some people even get great value from cards that they never use. 

Today’s article is all about cash back cards.

You want this. Let’s go get it.

Who doesn’t like getting cash back?  Cash is obviously the most liquid of all of the rewards out there.  You can use it for anything you want.  And with airline reward seats getting harder and harder to come by, people who just want free coach domestic flights are rightfully looking at cash back cards.  Sure, I can use 25,000 Delta Skymiles for a free round trip flight anywhere in the continental US…but only in theory.  In practice, one will quickly discover that those flights either a) are unavailable, b) involve undesirable or downright illogical connections, and/or c) are only available on Tuesdays and Wednesdays.  Little wonder so many people are saying “You know what?  I’ll use a cash back card instead of an airline miles card and then buy whichever flight I want.”  That’s a reasonable approach, but let’s make sure you are using the right cash back card(s).  And by the way, when we dive into airline credit cards, we will see some counter arguments to what I just described above.

If I were chasing cash back for any level of spending, I’d start with the Citi Double Cash card and not think twice about it (pardon the pun).  It is one of the simplest cards out there to understand.  You earn 1% cash back on every purchase, but you earn an additional 1% cash back when you pay off the purchase.  As a result, you earn 2% back on all purchases.  Also, the Double Cash has no annual fee, which is truly amazing given the generous cash back level. 

  • Pros: Best cash back rate available among cards with no bonus categories; there is no annual fee
  • Cons: No signup bonus (if you have another card from Citi gathering dust, call them and see if they will convert it to a Double Cash); as a Mastercard, it is NOT accepted at Costco (but you can buy Costco gift cards with it on Costco.com)

My favorite cash back card

There is only one other no annual fee cash back card which provides 2% on everything, and that card is the Fidelity Rewards VISA signature card.  The downside to that card is that you must have a brokerage account with Fidelity into which to deposit your rewards. 

Other cash back contenders:

  • Chase Freedom Unlimited – earns 1.5 Chase Ultimate Rewards points for each dollar spent. That’s 1.5% cash back if you choose to use your points that way.  As the rest of the articles in this series will make clear, however, these points can quickly and easily become worth more than 2% back if you use them for travel.  I love Chase points because you can use them for cash back if you like (at a lower rate of return) or you can use them more lucratively for travel.  If cash back is truly your bag, then go with the Citi Double Cash.

  • FreedomChase Freedom – This card is similar to the just described Freedom Unlimited, but rather than a flat 1.5 points per dollar, you earn 1 point per dollar on everything…except in the given bonus category for each fiscal quarter. In the quarterly bonus category, you earn 5 points per dollar, which equates to either 5% cash back or significantly higher than 5% for travel.  The 5x bonus is on the first $1500 spent in the category.  Some people hate the rotating quarterly bonus approach, but I personally feel it is foolish to ignore them.  Believe me, when 1/1, 4/1, 7/1, and 10/1 roll around, I know what my Freedom will be doing for me.  And with warehouse clubs being 5x bonus categories for the rest of 2016, there is room to save a ton at Costco!
  • Discover ItDiscover It – This card is almost identical to the Freedom (rotating 5% back categories), but with a couple of very important distinctions. First, you earn cash back.    These are not points that can be leveraged for greater value by redeeming for travel.  Second, and this is huge, Discover doubles your rewards for the first year!  After you have had the card for a year, Discover will again pay you whatever cash back you earned during the first year.  So, if you earn $200 in cash back during your first year, you will get $200 during the year and another $200 at the end of the year.  Lastly, Discover is not quite accepted everywhere, but it’s rare that I have been unable to use it.
  • American Express Blue Cash Preferredpays a whopping 6% cash back on groceries (but only the first $6000 per year, a major downer) and unlimited 3% cash back on gas and department stores, 1% on everything else. $95 annual fee.  As I am sure you are aware, AMEX cards are not accepted everywhere.
  • American Express Blue Cash – Identical to the Preferred version above, but without the annual fee and with the respective bonuses on groceries and gas/department stores being 3% and 2% rather than 6% and 3%.
  • You can find a ridiculous number of cards that are best for a specific spending category. Here is a tremendous list you can peruse if you are curious.

Now, obviously I did not cover every cash back card, and I don’t want to try.  The Quicksilver from Capital One has been around for a while and is popular, but it’s 1.5% cash back is outdated in my opinion.  The Double Cash earns 2% back, which is 33% higher.  If I want 1.5%, I’ll use the Freedom Unlimited and know I can use my points for cash or for travel (at a better rate of return).

What is your next step?  Well, for obvious reasons, I hope you will continue to read the series as it comes along!  Before you think “I need to apply for all of these cards”, remember that we will be looking at lots of different types of cards in this series.  You may decide that cash back is not for you because you can get more in travel rewards.  Flexible point rewards in particular will be eye-opening if you are not familiar with them.

But, for those of you who say “I only want cash back and you are not changing my mind”, here is what I would personally do in that situation:

  • Get the Discover It and Chase Freedom cards. Those 5% categories are easy money, and fortunately for us, Discover and Chase usually do a good job of not having the same categories at the same time.  For Q2 of 2016, the Freedom offered 5% back on Groceries and Warehouse Clubs while the Discover It offered 5% back on Dining.  That’s an awesome quarter.  Q3 is going to feature Dining and Warehouse Clubs on the Freedom and Amazon on the Discover.  That’s another great quarter.  And it bears repeating…the Discover will double your cash back for the first year, so their bonus categories effectively offer 10% back during the first year, which is clearly sensational.
  • Get the Citi Double Cash card. Use it for anything that is not part of another card’s bonus category structure, thereby setting your baseline for cash back at 2%.  This is a fantastic “everything else” card.  Again, however, it cannot be used at Costco, but the Freedom fills that void tremendously.
  • If you spend $6,000 a year on groceries, and you are willing to carry an extra card, then either of the AMEX Blue Cash cards (annual fee or no annual fee) will put extra money in your pocket. If you go with the no annual fee version and hit $6,000 in groceries, that’s an extra $60 per year compared to the Double Cash.  The Preferred version gets you an extra $145 per year after subtracting the $95 annual fee.
  • If you have another category of spending for which there is a tremendous bonus (here is that article link again), then get and use that card for it.

Now, before you apply for these cards, let me issue some cautions:

  • Airline, hotel, and flexible point cards offer much more lucrative signup bonuses, so you may decide that you want to get a combination of cash back and airline/hotel/flex cards so that you get an immediate explosion of points from the travel cards along with the ongoing benefits of the cash back cards. That’s why I am cautioning you (again) to read all of the articles in this series before you make any rash decisions.  My goal is to write one article per week.
  • It may be possible to “product convert” another card to one of these cards. When the Freedom Unlimited came along, I had Chase convert my dust-covered Slate card to the Freedom Unlimited.  That spared me a hard credit pull from an application.  When the first year on my Citi Hilton Reserve ended, I converted it to a Double Cash.  Your chances are probably better for product conversions with Citi and Chase than with Discover as Discover does not have nearly as many products.  But check your existing portfolio to see what you have lying around.  Most of these cards do not have big signup bonuses because their value is in their ongoing rate of return.

Got a particular question about these cards?  Ask it in the comments section and I will happily give you an answer!

Hope you found this helpful.  If you enjoyed this article, please share it or email it so others can learn from it as well.  Let’s help as many people as we can!

 

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