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How to make the most of your 5% cash-back credit cards

Photo illustration of a person making a purchase by tapping their credit card on a card reader.
Credit cards featuring 5% cash back have specific rules and requirements for earning that top reward.
Photo illustration by Fortune; Original photo by Getty Images

When you’re selecting a cash-back credit card, the multitude of options can sometimes be overwhelming. But if your goal is to maximize the cash rewards you’re earning with daily purchases, there’s no need to settle for just 1% or 2% back. In recent years, credit cards offering 5% cash-back programs have become increasingly common and can be a valuable way to put extra money back in your pocket. 

But in order to ensure you’re making the most of the earnings potential with a 5% cash-back card, it’s important to understand how these programs work.

What are cash-back credit cards? 

Cash-back credit cards provide users with a specific percentage of cash rewards in exchange for each purchase made using the card. Sometimes, the cash back is available only for specific eligible purchase categories, which are outlined in the credit card agreement. And in the case of 5% cash-back cards, there’s often just one category each quarter that offers the higher-level rewards.

“Nearly all rewards are tied to category spending and have a cap; for example, some may offer 5% cash back on groceries up to $6,000 per year, while others offer 5% back off your first $3,000 spent at the pump,” says Nathan McManus, vice president of operations for Georgia’s Own Credit Union.

Cash-back credit cards are issued by a variety of banks and financial institutions. Examples include the Chase Freedom Unlimited®, which offers unlimited 1.5% cash back on all purchases, 3% on dining and drugstores, and 5% cash back on travel purchased through Chase Ultimate Rewards. Similarly, the Citi Custom Cash℠ Card offers 5% cash back on purchases in your top eligible spend category each billing cycle, up to the first $500 spent, then 1% cash back thereafter. Neither card has an annual fee.

How do 5% cash-back cards work? 

Credit cards featuring 5% cash back have specific rules and requirements for earning that top reward. And you’ll want to be sure you understand program guidelines to avoid missing out on potential rewards.

You have to manually activate the offer each quarter

A common requirement among 5% cash-back cards is that users must go through the steps of activating the top-tier cash reward each quarter or each month. When this step is not taken or accidentally forgotten, it means losing out on 5% earnings until the next month or quarter. 

“If you don’t activate all offers…you will forfeit them for the period,” says Michael Nelsykla, CEO and founder of Save, a banking and investment platform. “The activation should be automatic, but this is a gimmick to save costs for the [card] issuer by relying on the fact that people may be unaware.”

Some credit cards make it easy to opt in for the 5% each quarter by sending an email reminder that may include an activation link, while others require cardholders to be more proactive and log into their account each cycle on their own. This can generally be done online or via a mobile banking app.

“While the rewards on these cards can be a true value if you’ve selected one that aligns with your spending habits, the major caveat to look out for is that most require you to opt in, so you have to be diligent about taking that extra step to maximize the card’s benefit,” says McManus.

Each quarter there are new rewards categories 

Yet another common feature of 5% cash-back credit cards is rotating the category of spending that earns the most valuable rewards each month or quarter. Typically, the top earning rewards category is determined by the credit card issuer.

“Some cards will rotate based on your spending habits, so for instance if one month your biggest spending is at wholesale clubs, the cash back will reflect those purchases,” says McManus. “The most common categories include grocery stores, restaurants, gas stations, home improvement, and travel, and we’ve also seen some offer rewards for fitness clubs, entertainment, and transportation.”

Additional common cash reward categories include online shopping and drugstores.

The rotation of purchase categories for top rewards has both pros and cons. If you adjust your spending patterns accordingly, to match the 5% category of the month or quarter, it can be valuable. 

“Most people have regular spending patterns on food and groceries, so unless you are constantly chasing deals and can rotate your purchases, you are likely to lose more than win,” says Nelsykla.

There’s usually a limit on how much cash back you can earn

Not only do you have to activate the cash back each month or quarter, there is usually a limit to how much cash back you can earn on the 5% bonus category. For example, with the Chase Freedom Flex℠, cardholders can earn only 5% cash back on activated bonus category purchases each quarter (up to $1,500 in purchases, then 1% after that).

Not all transactions qualify for cash back 

In addition to cash back being limited to specific spending categories, there are also certain types of transactions that do not qualify. The most common example is balance transfers, which typically do not earn any cash rewards. 

“Balance transfers are the switching of credit card providers and the transfer of balances owed to the issuer. Since typically this spend has already been rewarded, it can not be rewarded twice as it’s just a transfer of a loan,” says Nelsykla.

Cash advances taken from a credit card are another example of transactions that do not typically earn rewards. “Cash advances are similar to an ATM withdrawal, or similar to a loan, and aren’t considered a purchase,” Nelsykla adds. “There is no merchant in between. And since the issuer doesn’t get paid by a merchant, they can’t give you rewards.”

How to redeem rewards

Once earned, cash rewards can typically be redeemed at the end of your monthly billing cycle in a variety of ways including a statement credit, direct deposit to a bank account, or even via a check. Similar to opting in for the 5% rewards category of the quarter or month, you will need to proactively cash out your rewards and request the type of distribution you want.

The takeaway

Credit cards offering 5% cash-back rewards can be a valuable tool to recoup some money on your purchases. But to use these cards to their full potential, it’s important to pay attention to the ins and outs of their program rules and requirements. Failing to opt in each quarter or month for top-tier rewards categories can mean missing out on valuable cash-back opportunities.

If you don’t want to fuss with activating a different category each quarter, you could opt for a flat rate cash-back card or one that offers higher rewards in certain categories, depending on how you find yourself shopping.

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