Calculating Break-Even For Cash-Back Reward Cards

Cash-back is easier to calculate. Here is the formula:

Cash-back = (Total Annual Spending x Rebate Percentage) – Maximum Limit

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Let’s assume that you’re carrying the American Express Blue Cash Card. There is no maximum limit to the amount that you can earn annually. Here are its reward payment terms:

Cash Back on Normal Purchases*
$0 - $6,500                  - 1.0%
$6,500.01 or more        - 5.0%

Cash Back on Other Purchases
$0 - $6,500                   - 0.5%
$6,500.01 or more         - 1.5%

*Normal purchases include eligible purchases made at U.S. supermarkets, gas stations and drugstores, in each case that are not departments of superstores or warehouse clubs."

Assume that you charge $500 per month or $6,000 per year on “normal” purchases. That puts you in the 1% category. If you follow all of the purchase rules, your annual cash-back rebate check will be $60. Since the card has no annual fee, all of that $60 is yours. However, since you can’t buy your $118 example round trip ticket for $60, you’ll either have to spend more or wait two years and hope that the cost of that ticket doesn’t go up!

After calculating your break-even, you may very well decide that a reward card is not suitable for you. I then recommend you select a basic “no frills” card. Don’t bother trying to accumulate frequent flyer miles with your credit card - if you do need a “top-up”, there are better and more cost-effective options. See our Special Feature, How to “top-up” your frequent flyer miles balance.

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