Why It Pays to Get a Credit Card With an Annual Cash Back Reward

A lump sum reward could benefit you more than rewards that trickle in every month.

Key points

• Some credit cards let you cash rewards monthly, while others give out rewards once a year.
• Annual rewards may help your financial picture more than monthly ones.

The great thing about using credit cards is the opportunity to get rewarded for the things you were already planning to buy. In fact, over the past 11 months, I've racked up about $700 in cash back rewards on a card I use frequently. But I don't have access to that money just yet. Rather, my credit card company makes it available to me every February. While some credit card users may not like a setup where they get a reward payout annually, for me, it's a very good thing.

The upside of getting annual cash back rewards

Some credit cards let you rack up rewards continuously and cash them out every month. And while there may be a minimum at play depending on your card, you may, for example, have the option to score $40 in cash back here or $50 there.

Having that money available to you on a regular basis could help with cash flow, especially if you find that you tend to come close to having spent your entire paycheck by the end of the month. But I prefer an annual cash back reward for a big reason.

For my credit cards that reward me monthly, I tend to take that cash back and spend it. After all, $30 here and there isn't going to make a huge difference in my finances, so I'll often use that money for an extra takeout meal or treat for my kids. But when I get a multi-hundred-dollar cash back payout, I'm more motivated to either save it or put it to good use.

Take the $700 in cash back I've racked up already. By February, I may have more like $750 based on my projected spending between now and then. That's a nice sum of money to put into my savings account or brokerage account. Or, I might take that money and earmark it for a weekend trip later in the year. The point, however, is that I won't in any way be tempted to just blow $700 to $750 on a whim -- whereas I often am tempted to spend my smaller rewards when I get them monthly.

What's the best rewards setup for you?

If you have a tendency to give into impulse buys, a credit card with an annual cash back reward may do a better job of helping you keep up with your financial goals. That said, if your current credit cards let you cash out your rewards on a monthly basis, you don't have to do that. Instead, you can simply let your rewards accumulate and then take one large payout at the end of the year. Or, you can take your cash back every six months. There are different options to play around with.

The point is that an annual cash back reward may end up helping your finances more than a series of monthly rewards. And that's something to keep in mind when you gear up to apply for your next credit card.