The Pros and Cons of Cash Back Credit Cards
There are plenty of financial benefits of cash back rewards cards. Just make sure that you don’t fall victim to traps that will wipe out those benefits.
What if your life could become one to five percent cheaper, without fussing with coupons or endlessly chasing sales? A lot of people do just that with cash back credit cards, which give you a small slice of your money back with each purchase. But how much do they really help? Let’s look at the pros and cons of cash back credit cards.
How Do Cash Back Cards Work?
You’ll need good or excellent credit in order to get most cash back credit cards. There are a range to choose from, and some are more complex than others.
Most cash back cards offer a base level of cash back – usually one to two percent of all purchases.
Some even raise the bar higher, offering up to five percent cash back rewards on certain categories such as groceries, gas, or dining out.
Your money can come back to you in one of two ways after you’ve paid it back: as a statement credit against future purchases, or as an actual check. (Sadly, they don’t print them out on big checks like they do for lotto winners.) Always make sure to check the details of how the rewards system works. It’s boring, I know, but it’s the only way you can maximize your hard returns.
The Cons of Cash Back Credit Cards
It’s already well-established that swiping a plain-Jane, no-rewards credit card makes you more likely to rack up charges.
Swiping a card just doesn’t have the same feel as handing over cold, hard cash. With cash back credit cards, it gets even worse.
People can easily go out-of-control with their spending by viewing each potential purchase as a rewards-earning opportunity not to be missed.
“Some people will view failing to make the purchase the same as losing that money,” says financial expert Peter Neeves. “They completely forego any cognitive evaluation of the future consequences of the impulse decision.”
The Benefits of Cash Back Credit Cards
Even with the drawbacks, cash back credit cards can be a powerful tool as long as you’re responsible about using them. Andrew Fiebert of the Listen Money Matters podcast knows all about this – he funnels virtually all of his non-mortgage spending through his cash back credit card and pays it off each month.
Yes, you technically could use those cash back rewards to buy a complete set of all the Mystery Science Theater shows; but it’s probably a better idea to use that money to get ahead. We’re wearing our grown-up pants, after all.
Andrew considers his cash back rewards to be “found money” that isn’t accounted for in his budget, so it goes straight into an investment account along with all other non-planned money like work bonuses. Each monthly deposit of $85 to $120 is a seed that will grow into a tree, and he’s planning to build an entire rainforest down the road.
How to Use Cash Back Credit Cards Without Getting Burned
Using a cash back credit card doesn’t have to burn you. It all boils down to a simple three-step approach:
1. Find a good credit card that will work for you.
Search around for a credit card whose cash back rewards match your spending patterns. Have a large, hungry family? Find one that offers more cash back on groceries. Drive a lot for your job? Check for one that offers more cash back on gas. If you have pretty even spending all-around, then opt for a simple flat-rate cash back credit card.
2. Always pay your bill in full at the end of each month.
Cash back credit cards are worse than worthless if you’re keeping a balance on them. They’ll end up costing you money. Each month, you’ll pay interest charges on that balance, and the 16.49 percent APR drowns out the measly one-percent cash back.
Credit card companies are banking on your weakness being racking up a balance (literally). Don’t be weak and feed the fat-cat bankers.
3. Don’t buy things you wouldn’t otherwise have bought with cash.
The key to profiting from cash back credit cards is to not to buy stupid things. Only use them to make normal, everyday purchases that you can afford and avoid carrying that balance. “You don’t build wealth buying things you don’t need. It’s a bit of twisted irony – the most cash back go to those who need it the least,” says Andrew.