Q: Is there such thing as a 3% cash back credit card? I think I remember seeing some years ago?
A: Thanks for your email Paul. Over the past fifteen or so years, we have seen a surge in the popularity (and variety) of cash back credit cards. This is no surprise – after all, we might as well get a little something back on the money we spend, right 
But can you really get as high as 3% cash back?
3% cash back on regular purchases?
There is no card on the market that gives a 3% rebate on all purchases. If credit cards did they, they would actually be losing money. You see the credit card transaction fee paid by the merchant hovers around 2% to 2.5% of the total amount. That amount is then split with the payment network (either Visa, MasterCard, Discover, American Express) and the bank the issues the card (Bank of America, Citi, Chase, etc).
So the bank that issues the card may only be getting around half of that transaction fee (around 1%). Since they are the ones that are responsible for creating rewards programs and paying them out, you can see why it would be impossible for them to pay out 3% cash back if they are only making around 1% on your purchase.
However, since Discover and American Express operate as both the bank that issues the card as well as the payment network, they have the ability to be more generous in their rewards (we’ll talk more about this in a moment).
3% cash back on certain categories?
Now you mentioned that you recall seeing cards with a 3% rebate in the past. What you must be referring to are those credit cards that give a higher reward for certain categories of spending. At the early part of last decade (around ‘00 to ‘05) there was more than one 3% cash back credit card available; they would give 3% (sometimes even 5%) on categories like gas, groceries, and drugstores.
Chase and Citi each had cards that did this. Although they were losing money on the 3%, they counted on the fact that those categories would only be a portion of your total spending – so they could make the money back on your regular purchases, as well as any interest you may be paying.
Those 3% cash back credit cards were great but unfortunately, since they were issued by Chase and Citi, it ended up not being profitable for them. Since they also had to pay Visa/MasterCard to process the transactions, what was left simply wasn’t enough to warrant paying out such high cash back. So those cards were either discontinued completely, or their reward structures were changed to give only average rebates instead.
How to get a 5% cash back credit card? (sponsored)
As mentioned, the secret it to get a Discover/AmEx card. Since they are both the issuer and payment processor, they make more money on each transaction – so they can afford to pay out high rewards. Between these two companies, by far the best one is the Discover More – there’s no annual fee and they give 5% cash back on over a dozen categories! Check out my Discover More review to learn more.
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