It seems like a no-brainer. Every time you use a cash back credit card, you get a percentage of the purchase back into your account. It is, in fact, a rebate. The cash back credit card is great for daily purchases. Sometimes for each purchase, you earn points and you can redeem the points when you choose. This is a popular format for folks who buy gasoline using their card.

How do card issuers offer this and how do they benefit? When you use your card, the merchant has to pay a transaction fee. The card issuer offers a part of that fee back to the consumer. For instance, you buy a home appliance that costs $800. The merchant pays a credit card transaction fee of $16. If the card issuer is offering you a cashback of  1% or $8, the cash back comes from the transaction fee. Apart from this, the credit card companies make money by charging high interest rates on the credit and by charging late fees if a consumer misses a payment. The more the consumers use credit cards, the higher that chances that they will not pay on time and will owe interest and late fee to the credit card companies. In all, it makes sense for credit card companies to offer incentives in different forms to consumers in order to make them use their credit cards for purchases instead of using cash or debit cards.

As far as the consumer is concerned a cash back card offers a rebate each time they purchase and if the amount is coming out of the merchant’s pocket or the card company’s it hardly matters as long as it does not come out from their pocket! The added bonus is that in most cases, these cash backs are tax-free as they are treated as discounts and not income. This makes them a better earnings tool than if the same amount would have been put in a bank deposit.

There are three different types of cash back cards. You must take a look before you find which one suits you best.

Flat rate cash back cards

In the flat rate cash back cards you are assured a fixed percentage cash back no matter what the item or service purchased. These cards are preferred highly since they are quite straight forward and there is no waiting period to redeem the points till they accumulate and so on. These cards are akin to instant gratification on whatever is bought. For example, many top cash back cards offer 1.5% cash back on every purchase, every day.

While buying a flat-rate cash card check on the annual fee if any and any starter bonuses.

Tiered Cash Back Cards

Some cash back cards offer different % of cash backs depending on the categories. Capital One’s Savor for instance is offering 3% cashback on dining and entertainment and 2% at grocery stores. All other categories have 1% cashback.

This card is good for consumers who have higher spending in some categories over others. They can select the cash back card that gives them higher rebates on their more frequent purchases. A businessman who entertains may spend more on dining and entertaining and could use a tiered cash back card to his benefit. Low or no annual fee and bonuses are an added plus.

Bonus Category Cards

This type of cards offer bonuses for different categories for different time periods. They offer high cash back in their category of choice. Typically every quarter the category changes. The Chase Freedom Bonus Category card for instance offers bonuses on gas stations, tolls and pharmacies in Q1. In Q2 it offers bonuses on home improvement and groceries. Q3 will see offers in gas stations and grocery stores and Q4 in department stores and clubs.

So the points to be noted while picking the Bonus Category Card is if the categories match with your spending categories, annual fees, and bonuses if any.

It is a good idea to keep a combination of these cards for purchases. You can use different cards in a mix and match basis to accumulate savings. A word of caution, don’t go overboard on the spending to rack up cash back rewards. Continue to spend as per your budget but save a little as you go along. Do try to pay the balance in full each month or you could attract interest that negates the benefits of the cashback. Happy card shopping.