When evaluating rewards credit cards, especially those offering cash back, the rewards value stands as the most critical factor. This value encompasses several elements, including the average cash back rate, projected annual cash back earnings, the value of any sign-up bonuses, and the flexibility of reward redemption. Understanding these components is key to effectively Compare Cash Back Rewards Credit Cards and choose one that aligns with your spending habits and financial goals.
To estimate the potential annual cash back earnings of a card, it’s essential to first determine its average cash back rate. This is calculated by analyzing the card’s rewards structure across various bonus categories and assessing how well these categories match typical consumer spending patterns. Essentially, we evaluate if the card offers elevated cash back rates in the categories where people spend the most.
Consumer spending data from the Bureau of Labor Statistics (BLS) provides a reliable benchmark for understanding average spending habits. According to the most recent BLS data, average total spending in 2023 reached $77,280 per consumer. However, when considering credit card rewards, we focus on “chargeable” spending – purchases typically made with a credit card. By excluding expenses like housing, vehicle purchases, and education, we arrive at an estimated annual “chargeable” spend of approximately $22,500.
Key spending categories contributing to this annual spend include:
- Groceries: $6,000
- Dining out: $3,900
- Entertainment: $2,500
- Gas: $2,400
- Apparel and services: $2,000
These categories form the basis for weighting a cash back card’s bonus rewards. For instance, the cash back rate on groceries is weighted at 26 percent, reflecting the significant portion of an average budget allocated to groceries. The redemption value of cash back is typically straightforward – $1 cash back is worth $1 – making it a highly valued and easily understandable reward type when you compare cash back rewards credit cards.
By applying these weightings and the clear valuation of cash back, we can estimate the average annual cash back earnings for a card. This represents the amount of cash back you could expect to earn if your spending aligns with the average consumer and you utilize the card for all eligible purchases. We also apply cash back valuations to determine the value of sign-up bonuses offered in the form of cash back.
With these calculations, each cash back rewards credit card can be scored based on its average cash back earnings, sign-up bonus value, cash back rate, and redemption simplicity compared to other cash back options.
Cards with superior values in these areas receive higher scores, making them more attractive options when you compare cash back rewards credit cards and increasing their likelihood of being recommended.
Here’s a closer examination of the factors considered when evaluating the “Value” rating of a cash back rewards card:
