Why a Cash-Back Credit Card Is a Good Place to Start

As more banks work to improve accessibility to credit cards and introduce cards that base eligibility on factors other than credit scores, there are bound to be more new applicants. If you’re among the consumers new to credit cards, you might be both intrigued and wary. A no-fee, flat-rate cash-back card could be the answer to your concerns.

Conflicting feelings about credit cards are understandable. Maybe you grew up in a family that didn’t use credit cards or know people who have gotten into debt trouble with them. A recent NerdWallet survey found that respondents had an average of $6,741 in credit card debt in 2020.

“Credit cards may have a bad reputation, but they actually are great financial-planning and money-management tools — so long as you use them correctly,” Paul Golden, spokesman for the National Endowment for Financial Education, said in an e-mail.

If you’ll be one of those first-time applicants for a credit card, here’s why a no-fee, flat-rate cash-back card could work for you.

Why no fee?

Many people dislike the idea of paying an annual fee for a rewards credit card, and there’s a good reason: It reduces the overall annual value of your rewards. For example, if you pay an annual fee of $100 on your card, but you only earn about $100 in cash back with it each year, you’d just be breaking even.

no-fee credit card, on the other hand, is a low commitment. If you end up disliking the card and want a different one, or you decide credit cards are not for you, you can stop using it with little consequence. You’re not out any money.

As a new cardholder, though, you’ll want to monitor your purchases closely. Do you find yourself overspending because it’s so easy to pay with a credit card? If so, credit cards might not be the best idea for you.

Note also that “no annual fee” doesn’t mean cost-free. You still could owe money if you don’t pay off the balance each month or you incur a late-payment fee, for example.

Why flat-rate rewards?

Simplicity is important with a first card, and it doesn’t get simpler than flat-rate rewards. With these cards, you’ll often get at least 1.5% cash back on all your purchases. You might even find a card that pays 2% cash back.

That rewards rate might not sound like much, but it adds up. Let’s say you normally spend $1,500 per month. If you put that amount on a flat-rate 2%-back card, you would get $360 back annually. That’s a significant amount of free money each year for spending you would ideally be doing anyway.

Some cash-back cards offer a higher percentage back, like 3% or 5%, but only on purchases from certain merchants, such as restaurants or gas stations. But those purchases might account for just a small portion of your overall spending, meaning a simpler flat-rate card could be a better choice. Also, bonus categories only add complexity, which you don’t want in your first card.

Why cash back?

“If you are looking for a card with incentives, consider one that offers flexibility and has rewards you will use,” Golden said.

Cash is the best rewards currency in terms of flexibility, because you can spend U.S. dollars on almost anything. It’s often rewarded in the form of a statement credit, so you reduce your next month’s bill. But you can also get cash rewards as a bank deposit or paper check with some cash-back cards.

By contrast, points and miles can be devalued by the issuer. It might require you to redeem more of its brand’s currency (e.g., Citi ThankYou points) for the purchase you want, whether that’s gift cards, merchandise or an airline ticket.

Long-term use

If you find you like using rewards credit cards and graduate to adding a card with bonus categories, you can still use the no-fee, flat-rate cash-back card.

A popular strategy is to use the bonus-categories card for spending in the categories, such as restaurants or gas stations. And then use your trusty flat-rate rewards card for everything else.


Gregory Karp writes for NerdWallet. Email: gkarp@nerdwallet.com. Twitter: @spendingsmart.

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