I receive compensation for many links on this blog. You don’t have to use these links, but I am grateful to you if you do. American Express, Citibank, Chase, Capital One and other banks are advertising partners of this site. Any opinions expressed in this post are my own, and have not been reviewed, approved, or endorsed by my advertising partners. I do not write about all credit cards that are available -- instead focusing on miles, points, and cash back (and currencies that can be converted into the same).
When I think about 2% cash back cards, I think of Saturday Night Live’s First Citywide Bank of Change.
A lot of people don’t realize that change is a two-way street. You can come in with sixteen quarters, eight dimes, and four nickels – we can give you a five-dollar bill. Or we can give you five singles. Or two singles, eight quarters, and ten dimes. You’d be amazed at the variety of the options you have.
…All the time, our customers ask us, “How do you make money doing this?” The answer is simple: Volume.
Ron Lieber covers the economics of 2% cash back credit cards and is skeptical that they can make money, and thus skeptical that they’ll last.
Banks need to pay for marketing the cards initially, pay for the rewards, service the accounts and cover losses when people don’t pay their bills.
The revenue, however, is not always predictable. Merchants pay fees to accept cards, but different merchants pay different amounts.
One suggestion is that they can make money monetizing the data from purchase transactions, and that can cover the spread between their earnings and rebates.
Lieber mentions several of the best products:
- Barclaycard Arrival+ World MasterCard “The Barclaycard puts 10 percent of your points back into your account when you redeem, giving it an effective yield of 2.2 percent on every dollar you spend” when you redeem for travel. That’s the highest return you’ll get, outside of Bank of America’s Travel Rewards when you have $100,000 or more invested through the bank.
- Fidelity Investment Rewards American Express has no annual fee and requires funds to be deposited into a Fidelity brokerage account.
Fidelity helps pay for the reward on this card, which has paid out $925 million in its history
Lieber got Fidelity to commit not to reduce earnings for 18 months, “so anyone who starts using that card now will be safe until November 2016, at least.”
- Citi Double Cash has no annual fee, offers Mastercard acceptance (so broader than the Fidelity co-brand Amex), and offers 1% back at purchase and 1% back when you pay off the card without the need for a specific brokerage account.
Ms. Collins, the Citi spokeswoman, said Citi’s redemption procedures were “consistent with industry practices.” If people buy things and pay for them within the same billing cycle, she said, they will receive all of their 2 percent rebate in that same period.
Lieber asks Capital One “why Citi could afford 2 percent cash back while Capital One’s cash-back cards pay only 1.5 percent,” and surprisingly CapOne failed to mention that their Spark for Business offers 2% back. (Although pointing this out could underscore that their Venture products are less generous than their business offerings.) They do offer ‘double points’ on all purchases, making their Venture product close to as good as Barclay’s Arrival+ product (which also gives you a 10% rebate on travel redemptions).
Unmentioned is the Discover Miles card which is a 1.5% back product — but doubles the rebate in year one, giving a 3% return. Of course Discover acceptance is limited.
Lieber points out that if you want premium cabin international airline awards, miles and points cards are likely better.
These cards are not for everyone. World travelers with plenty of flexibility can collect frequent-flier miles via their card spending and redeem them for business- or first-class airplane tickets to far-flung locales that would otherwise cost many thousands of dollars. I have personally received an effective 10 percent rebate on my card spending by doing this in the past, though it becomes much harder if you are anchored to school vacation calendars for 20 years.
This is why I do not actually have a cash back card. I want miles. Even for unbonused spend, my valuation of miles and points suggests that I should be using my Starwood Preferred Guest American Express Card and not a cash back card. And I believe that the Chase Sapphire Preferred Card remains the best overall rewards card.
Nonetheless, if you would redeem points for economy tickets a cash back card is usually best. Although, of course, for short distance trips you can’t really beat British Airways points — since awards start at just 4500 points each way when travel is under 650 miles.