A cash back credit card gives you money every time you use it. Of course you have to spend money to get this money, so in order to take full advantage of this type of offer, you must plan your purchases strategically.
Any type of credit card can spell trouble for the consumer. Buy now, pay later. But what if you can’t pay later? It’s important to try hard to buy more of what you need and less of what you want, and to stay within a reasonable budget so that you can pay your bill in full each month.
Getting cash back for purchases you were planning to buy anyway — regardless of how you paid for them — like gas or groceries is the best way to get ahead with this type of program.
Number 4 on Time magazine’s 15 Credit Card Do’s and Don’ts is don’t carry a balance. The average American household’s credit card debt is $8,000, and studies show the poorer people are, the higher their credit card debt.
So you know you don’t want to owe the credit card companies money. How do we get them to give us money?
Credit Card Interest Charges and Fees
Credit card companies compete for business by trying to offer the consumer the best deal. They make most of their money in interest fees their customers pay for the privilege of carrying a balance, but they also make between 1.5 and 3.5 per credit transaction (fees vary depending on the card). So they can afford to offer cash back, rewards or other types of freebies to customers and still make a profit.
This is why you see some smaller businesses charging a fee to use a credit card or requiring a minimum purchase — their profit margins may be smaller, and they may be counting every penny. It’s also why some merchants won’t take American Express — their fees per transaction are the highest.
Cash Back Credit Cards’ Convoluted Rules
Some credit cards offer customers up to 5 percent cash back, which sounds like a pretty good deal. But is it?
It can be. But you only get the 5 percent back on money you spend in particular categories earmarked by the credit card company. Examples of these categories are 5 percent back on purchases at particular gas stations and wholesale clubs. If you don’t have a car or belong to a wholesale club, you won’t reap any rewards. And if you do, the company usually sets a cap as to how much you can get back during that period.
Other money back offers vary in the percentages for different categories. For instance, one card may offer 4 percent back on restaurant purchases, 2 percent on airfare and 1 percent on everything else. If you look at your cash-back bonus as a fun little reward every month, this will work fine for you, but if you are trying to get the most out of the offer, know you will have to work hard for it.
If you have multiple cards and want to make sure you are using the one that offers the most cash back in the category you are about to spend money in, you may need a spreadsheet.
Sometimes Less is More
So-called “simple” cash back cards make it a little easier on you and offer a flat rate on all purchases. But, you may not be allowed to spend the cash on anything you want — it might be earmarked for travel or dining purchases. So if you are buying something you would otherwise not buy just to take advantage of the program, it’s probably not a good idea to sign up.
Creditcard.com ran a comparison among cards that offer 2 percent back on all purchases, 5 percent on purchases in a particular category and 6 percent on tiered rewards in various categories. It showed that under the most optimal circumstances, maxing out the preferred categories and tiers, consumers are ahead with the card that offers 2 percent on everything.
The total cash back on $20,000 spent is $412.90 on the 2 percent card — 31 percent more than the cash back in the 5 percent category and 59 percent more than the 6 percent category.
Rewards on Cash Back Credit Cards
CNN Money cautions those who sign up for programs with credit card companies hoping to get a free vacation from the rewards points. Although it’s possible, the credit card companies don’t make it easy. You have to invest the time in making the right purchases and using them.
First, CNN says, beware of the baggage attached to some of these travel rewards programs. You may get “free” access to airport lounges, but you may pay a higher credit card fee in exchange.
Beyond this, you may have to spend significantly every month in order to get the maximum amount of points — sometimes several thousand dollars. The reality of this is that usually the only people able to do this are frequent business travelers and rich people — the ones who don’t need a free vacation.
Like extreme coupon clipping or shopping the sales at multiple stores, you can save money with cash back credit cards, just remember to count the time you invest in reaping the rewards.
Every Buck Counts is here to answer all your questions about cash back credit cards, loans, banking, personal finance and more.