This is the most common decision in cash back, and it is usually made on instinct. It should be made with a calculator, because the answer flips at a specific and findable point.
The structures
A flat-rate card pays the same percentage — commonly 1.5% or 2% — on everything, forever, with no categories, no caps and no activation.
A category card pays a higher rate, often 3% to 5%, on defined categories, and a lower base rate — frequently just 1% — on everything else. That base rate is the part people forget, and it is where the comparison is usually decided.
The break-even
Compare a flat 2% card with a card paying 3% on groceries and 1% elsewhere. Every dollar of grocery spending earns you an extra 1% on the category card. Every dollar of non-grocery spending costs you 1% relative to the flat card.
They break even when grocery spending equals half of total spending. Below that, the flat card wins. Above it, the category card does.
| Groceries | Everything else | Flat 2% | 3% / 1% | Winner |
|---|---|---|---|---|
| $500 | $2,500 | $60.00 | $40.00 | Flat |
| $1,000 | $2,000 | $60.00 | $50.00 | Flat |
| $1,500 | $1,500 | $60.00 | $60.00 | Tie |
| $2,000 | $1,000 | $60.00 | $70.00 | Category |
Very few households spend half their money in a single category, which is why flat-rate cards suit more people than the marketing implies. The picture changes when the category card offers several bonus categories at once, or when its base rate is 1.5% rather than 1%.
The case for each
Consider it if
- Flat rate: no categories to track, no caps, no activation
- Flat rate: every dollar earns the same, so no purchase is ever misplaced
- Flat rate: reliable for irregular or unpredictable spending
- Flat rate: usually no annual fee
Think twice if
- Flat rate: leaves value on the table if your spending is heavily concentrated
- Flat rate: rarely the top rate in any single category
- Category: requires you to use the right card at the right merchant
- Category: bonus categories can be capped, and the base rate is often poor
Why holding both usually wins
Two no-fee cards — one flat rate, one category — cover both situations. Use the category card where it pays more and the flat card everywhere else.
For the household in the table spending $1,000 on groceries, this combination earns $30 on groceries at 3% plus $40 on the remaining $2,000 at 2%, for $70 a month. Neither card alone reaches that.
The cost is remembering which card to use in which shop, which is a genuine cost for some people and none at all for others. If a forgotten card means a category purchase earning 1% instead of 3%, the optimization has cancelled itself out.
How to decide in ten minutes
- Total three months of spending by category and average it.
- Identify your largest category as a percentage of total spending.
- Apply the break-even formula for the specific cards you are considering.
- If your largest category is below the break-even, take the flat-rate card.
- If it is well above, take the category card — or hold both.
