Credit cards with 1.5 percent cash-back rewards rates are going from novel to normal.
Today, consumers can get no-annual-fee cards that offer 1.5 percent cash back on every purchase from several major issuers — including Capital One, Barclaycard, Chase, Wells Fargo and U.S. Bank. Citi offers an even higher rate: 1 percent on every dollar you spend and another 1 percent on every dollar you pay off.
If you avoid interest charges, these cards can earn you hundreds of dollars per year in rewards without requiring any extra spending. They also signal a big change in the credit card industry.
“For a long time, 1 percent has been seen as the floor,” says Sean McQuay, NerdWallet’s credit card expert.
[See: 8 Ways to Maximize Your Credit Card Rewards.]
How we got to 1.5 percent. Every big credit card trend starts with one issuer. If the feature is a hit with cardholders, other issuers will introduce it, too.
“Everyone jumps on the bandwagon,” says Tiffani Montez, a senior analyst for the banking consulting firm Aite Group. “But then, as things progress again, everything starts to flatten, and there becomes this new normal for what’s acceptable for cash back. Then [issuers] go look for a new source of differentiation, such as credit monitoring and frictionless rewards redemption.”
Capital One launched its Quicksilver card in 2013, which offers 1.5 percent cash back and doesn’t charge an annual fee. It also debuted a version of the card for people with fair credit which has the same rewards rate but a small annual fee.
Call it the offer that launched a thousand flat-rate cards. During the next three years, other major issuers followed suit, giving us the Citi Double Cash, Barclaycard CashForward, Chase Freedom Unlimited, Wells Fargo Cash Wise and U.S. Bank Cash 365. These cards differentiate themselves with their sign-up bonuses, zero percent APR periods and redemption options. But except for the Citi Double Cash, which pays a higher rewards rate, they’re all making the same basic pitch to consumers.
It’s not too different from what happened 30 years ago when cards began to advertise “up to 1 percent back.”
In 1986, Sears introduced the first Discover card. It paid out rewards of “up to 1 percent back,” a more generous offer than any other cards had at the time. But the program was complicated. It gave users:
• 0.25 percent cash back on the first $1,000 spent.
• 0.5 percent cash back on the next $1,000.
• 0.75 percent cash back on the next $1,000 after that.
• 1 percent on any spending over $3,000.
The card was successful, and other issuers piled on with their own no-fee cash-back cards. They ramped up the rewards rates from “up to 1 percent” to “up to 2 percent.” And they added caps that limited how much cardholders could earn.
These cards no longer exist. The 1.5 percent cards have taken their place – and they’re head and shoulders above what was considered “good” in the ’90s, without the complicated systems of graduated cash-back rates and annual rewards caps.
By coupling 1.5 percent cards with modern tiered cards – which offer cash-back rates of 3 percent, 5 percent or more on certain categories and 1 percent on everything else – you can boost your combined cash-back rate above 1.5 percent. But without decades of fierce issuer competition, these cards might not have existed at all.
“It always takes one person to push it a little bit higher, and eventually, the rest will do the same,” Montez says.
[See: 12 Habits to Help You Take Control of Your Credit.]
What’s next? Probably not 2 percent. Whenever you see multiple credit cards making identical offers – 1.5 percent cash back and no annual fee, for example – you know something’s about to change. But it’s hard to predict what that something might be.
Based on cash-back rates during the past few decades, you might think 2 percent cash back is the next trend. And we’ve seen cards that offer something similar, including the Citi Double Cash. The Fidelity Visa also gives you a 2 percent rewards rate if you deposit your earnings in your Fidelity account – not traditional cash back, but close enough.
But so far, these cards are outliers.
“Many banks don’t find it economical to match that rewards rate,” says McQuay, NerdWallet’s credit card expert. “I think 1.5 percent will be the max we’ll see from the majority of issuers.”
But there’s a downside. As more issuers release 1.5 percent credit cards, consumers’ choices become more homogeneous. This can make it harder to choose a card, he notes. It also makes it difficult for some issuers to stand out.
“I think banks need to do more to differentiate themselves in this 1.5 percent category. There are quite a few cards, and they’re all virtually indistinguishable,” McQuay says.
[See: What to Do If You’ve Fallen (Way) Behind on Your Credit Card Payments.]
How to pick a flat-rate cash-back credit card. As long as issuers stick with the 1.5 percent rewards rate, here’s how you can get the best deal:
• Prioritize long-term value: Cards that pay 1.5 percent are great. But if you can qualify for a more generous card, choose that one.
• If it’s a tie, think about the short-term: If you can’t get a no-fee card that offers more than 1.5 percent, use the card’s extra features as a tie breaker. Plan on revolving a balance for a few months? Find a card with a good zero percent APR period. Traveling overseas? Go with one that doesn’t charge foreign transaction fees. Otherwise, pick the card with the largest sign-up bonus. If you pay your balance in full each month, the interest rates won’t make a difference.
Once you get that flat-rate card, use it for all the purchases that don’t fall under your other credit cards’ bonus categories. You won’t have to settle for “1 percent on everything else” anymore.