Q: Is there such thing as a credit card with 3% cash back? I think I remember seeing one years ago but is it still around for 2013?
A: Thanks for your email Paul. Over the past fifteen or so years, we have seen a surge in the popularity (and variety) of cash back credit cards. This is no surprise – after all, we might as well get a little something back on the money we spend, right 🙂 But can you really get as high as 3% cash back?
3% cash back on regular purchases?
There is no card on the market that gives a 3% rebate on all purchases. If credit cards did they, they would actually be losing money. You see the credit card transaction fee paid by the merchant hovers around 2% to 2.5% of the total amount. That amount is then split with the payment network (either Visa, MasterCard, Discover, American Express) and the bank the issues the card (Bank of America, Citi, Chase, etc).
So the bank that issues the card may only be getting around half of that transaction fee (around 1%). Since they are the ones that are responsible for creating rewards programs and paying them out, you can see why it would be impossible for them to pay out 3% cash back if they are only making around 1% on your purchase.
However, since Discover and American Express operate as both the bank that issues the card as well as the payment network, they have the ability to be more generous in their rewards (we’ll talk more about this in a moment).
But 2.2% rewards on everything IS possible in 2013…
Earlier this year Barclays came out with the Arrival card that gives 2.2% rewards on everything you buy, without any limit to how much you can earn. This is how it works:
- You earn 2 “miles” per dollar spent. Since each “mile” is worth exactly 1 cent in statement credits to offset any travel purchase made with the card, you’re essentially earning a 2% rebate.
- To sweeten the pie, they give you 10% of your miles back when you redeem them. For example, if you redeemed 20,000 of them they would give you 2,000 back to use again.
- Between the two, you’re earning 2.2%. Technically, it’s actually 2.22% since you keep getting the 10% back to re-use every time you redeem.
And right now is time to apply because of this promotion they’re running:
3% cash back on certain categories?
Now you mentioned that you recall seeing cards with a 3% rebate in the past. What you must be referring to are those credit cards that give a higher reward for certain categories of spending. At the early part of last decade (around ’00 to ’05) there was more than one 3% cash back credit card available; they would give 3% (sometimes even 5%) on categories like gas, groceries, and drugstores.
Chase and Citi each had cards that did this. Although they were losing money on the 3%, they counted on the fact that those categories would only be a portion of your total spending – so they could make the money back on your regular purchases, as well as any interest you may be paying.
Those 3% cash back credit cards were great but unfortunately, since they were issued by Chase and Citi, it ended up not being profitable for them. Since they also had to pay Visa/MasterCard to process the transactions, what was left simply wasn’t enough to warrant paying out such high cash back. So those cards were either discontinued completely, or their reward structures were changed to give only average rebates instead.
How to get 5% cash back?
In 2012 there are several credit cards on the market that offer up to 5% cash back in select categories. Many forum posters have reported averaging out at a rebate above three percent between the 5% categories and the 1% to 2% on everything else. Check out our sponsored ranking to see the current offers:
This article last updated August 10, 2013