How to use cash-back credit cards to your advantage

FORT MYERS, Fla. (CONSUMER REPORTS) Before you throw away any more of the credit card offers landing in your mailbox, take note: You might be overdue for a credit card makeover.

Adding a new card or two to your wallet can reward you for your spending or win you valuable new benefits, such as cell-phone insurance.

Yet 20 million consumers have never changed their preferred credit card, and an additional 25 million have held on to their favorite card for at least 10 years, according to a 2016 survey.

Among the most popular rewards is cash back for purchases. About half of all credit cards that offer rewards now offer cash back, up from around 25 percent in 2013.

“Some of the cash-back credit card programs being offered today are the most lucrative we’ve ever seen,” says Marc Bellanger, senior strategy director with Merkle, a marketing agency that works in the credit card and banking industry.

Unlike cards that compensate you with points or miles that can be redeemed only for merchandise or travel, cash-back credit cards refund a percentage (typically 1 to 2 percent, but up to 6 percent) of your charges, usually in the form of a statement credit, a check, or a deposit into your bank account.

The way they work is simple, but finding the card that’s right for you may not be. Some cards reward a flat rate back on all of your purchases; others give you a modest percent back on some categories of purchases and a higher percent back on others, such as gas or groceries.

Sometimes the amount you’ll get back changes each quarter. And some cards offer big bonuses if you spend a certain amount within the first few months.

In terms of costs, there are cash-back cards that charge an annual fee and others that require you to maintain another account at a particular financial institution, so you also have to consider those possible costs.

All of that research can be labor-intensive. To help make finding a more rewarding card less daunting, Consumer Reports used its proprietary credit card comparison calculator to review 83 rewards-card programs for six common spending scenarios based on data from the Bureau of Labor Statistics.

And because Consumer Reports found that you can earn up to 40 percent more cash back by strategically using two cards instead of just one, Consumer Reports came up with card pairings that will increase your refund.

Consumer Reports evaluated the programs over a three-year period because certain cards offer a generous sign-on bonus but more limited rewards in subsequent years. Consumer Reports also assumed that cardholders don’t carry balances (finance charges can swallow up any rewards). And in the case of cards that award points or miles but allow you to convert them to cash, Consumer Reports considered the actual dollar value of the rewards.

A few generous rewards cards came up more than once because they work well for more than one kind of spender.

Consumer Reports also provides a spending strategy for the two cards, because even the best pair is only as good as the way you use it. (To remind yourself which card to use for which purchases, keep a note in your wallet.)

For a more customized search for a cash-back card, try the Consumer Reports Credit Card Adviser Comparison Tool, powered by a version of the software Consumer Reports used for this analysis.

The tool compares the benefits of cash-back cards and lists them in order of best to worst based on your actual spending data. It also estimates for each card the total cash back you’ll receive after one year and after three years.

To use the tool, first review your credit card statements to determine your total yearly spending on gas, groceries, restaurants, and travel. (The rest of your spending goes into one category that the tool calls Everything Else.)

Then divide the totals by 12, plug in the monthly figures, and it will show you which credit card will pay you the most cash back in the first year and after three years.

Author: Consumer Reports