Maximizing Savings: The Benefits of Using All-Category 2% Cash Back Credit Cards

Selecting the right credit card can feel like navigating through a maze, given the plethora of options available. If you're keen on optimizing every dollar you spend, much like myself, you probably juggle several cards to maximize rewards across various categories. Yet, occasionally, you'll encounter a purchase that doesn't neatly fit into any of the specific bonus categories offered by your arsenal of cards. In such instances, you might reluctantly resort to a less rewarding option for the transaction. This underscores the importance of including an "all-category" card in your wallet, one that provides solid cash back on every purchase, regardless of the category. The benchmark for these cards is typically set at a 2% cash-back rate.

Should You Opt for a 2% Cash Back Credit Card?

Yes. If you do not already carry an all-category card that gives 2% cash back, then it's something I highly recommend getting earlier than later. We already are living in a world plagued by inflation so give yourself a boon per se in your expenses will keep yourself competitive in your ability to save more. The earlier you can get more cash back, the more impact it has on you and you continue to stack the cash back. I would also still encourage getting a 2% cash back card even if have category specific cards with a "everything else" category giving you 1.5% cash back. The 0.5% difference adds up over time.

Why 2%?

What you will find interesting after doing some research is that 2% is actually the highest you'll typically see for an all-category card. Why is it 2%? Why not 3% or 4%?

Well, all-category credit cards are typically capped at 2% for a few key reasons related to the economics of credit card operations and the balance between attracting customers and maintaining profitability:

1. Interchange Fees and Profit Margins: Credit card issuers rely on interchange fees, charged to merchants for each credit card transaction, as a significant source of revenue. These fees generally do not exceed 3% of the transaction value, and offering more than 2% cash back on all purchases could narrow the issuers' profit margins. This is especially pertinent when considering additional costs associated with running the card program, such as fraud protection, customer service, and administering the rewards program. Maintaining a balance that allows issuers to offer attractive rewards to cardholders while covering operational costs and ensuring profitability leads to the standard 2% cash-back rate for all-category cards.
2. Encouraging Specific Spending Behaviors: Credit card companies often use rewards to incentivize certain behaviors, such as spending in particular categories (e.g., dining, travel, groceries) that might have higher interchange fees or are more profitable due to partnerships with other companies. A flat rate on all purchases doesn't incentivize targeted spending, so issuers might limit the cash-back rate to encourage the use of different cards for different types of transactions.
3. Customer Retention and Acquisition: While offering more than 2% cash back could attract customers, issuers also consider the long-term value of customer relationships. They may find that a 2% rate is sufficient to attract and retain customers when combined with other card features and benefits.

Best All-Category Cash-Back Cards

• Wells Fargo Active Cash Credit Card (No annual fee) - This is a basic all-category card with 2% cash back but one of the few cards that offers a welcome bonus ($200 when you spend $500 in first 3 months).
• PayPal Cashback Mastercard (No annual fee) - PayPal has some nice perks on top of its all-category 2% cash back which includes being able to redeem cashback rewards immediately after spending (no need to wait for billing cycle to complete so throw that into your HYSA right away!). Another extremely powerful perk is you get an additional 1% cash back if you use PayPal Checkout and use the PayPal Cashback Master card as the payment source. For online shopping and even taxes, you can really get more out of the 3% total cash back.
• Bank of America Unlimited Cash Rewards (No annual fee) - Although this is 1.5% cash back on all categories, you can unlock a higher cash back if you are a preferred rewards member with Bank of America. The cash back boost can get you to 2.62% cash back if you are a Platinum Honor Tier member.
• Fidelity Rewards Visa Card (No annual fee) - Fidelity will occasionally offer welcome bonuses for this card ($100-$200), but the unique perks for this card includes no foreign transaction fees and the ability to deposit your rewards automatically into an Fidelity investment account.
• Robinhood Gold Card (~$50 - $60 annual fee due to Robinhood Gold) - This is the new card that Robinhood announced on 3/26/24 which gives 3% cash back on all categories. It is extremely new, but very enticing. Again, the economics points to this not being sustainable in the long-run unless the credit card rewards is funded by other means but definitely check out my post to see if it's something worth considering.

Final Thoughts

My first piece of advice to anyone new to credit cards is to get an all-category card first. It's a simple add that goes a long way and requires no mental energy to keep track on how to best utilize it. Don't settle for less than 2%! There are a lot of options out there to achieve this baseline. For me personally, I always carry an all-category card in my wallet and it helps me a lot when I run into situations where I don't know which card to use. Strange enough, it's also been my go-to for a online spend because as you know it, there's very little cards that have online shopping as a boosted category (hoping we get a 5% online shopping card one day!). I currently carry the PayPal Cashback Mastercard and the Fidelity Rewards Visa Card and use them both for different purposes taking advantage of their respective unique perks.