Cash back credit cards have become increasingly popular among thrifty shoppers. Most people do not mind using their credit to make the most by way of receiving some hard cash back.
However, are these cash back credit cards really worth the extra spending or increasing your debt? Here is a lowdown on the various pros and cons of cash back credit cards.
What is Cash Back?
Put simply, it is the money you get back on each purchase. This is a percentage of your spending amount that is credited back to your card. It is a way for credit card companies to encourage you to purchase more (chances are that a $200 pair of shoes you have been eyeing might suddenly begin to look affordable once you are offered a 5% cash back).
Many people are attracted by cash back credit cards because gaining an extra amount on things you were already going to purchase sounds too good to be true.
What is the Cash back Catch?
Free money is a hard to resist bait that credit card companies use to win new customers. However, when you read the fine print you realize that everything may not be as rosy as it was made out to be.
You might realize from the fine print that the 5% cash back was only on groceries and fuel and not on clothes. Many credit card companies narrow down their list of purchases to only specific goods and services at certain outlets such as at a drugstore or a fuel stop.
Some cards also come with their pre-set limit of maximum returns. The cash back will stop adding after you cross the maximum amount of percentage return.
Getting 5% cash back on purchases of $2,000 may sound like a lot. However, it can be slightly disappointing when you realize that the cash back had a max out limit of $50 (you might notice this only you see your month end card summary).
You can Accrue Debt
Credit cards can potentially put you in debt way above your financial budget. It requires serious self-control on your spending habits, particularly when you have a cash back credit card. Various cash back deals and percentage returns might entice you to buy things you do not need. This can make your monthly budget go for a toss.
Most credit cards allow you to surpass your credit limit. However, this comes at a stiff price. You could cancel out your cash back benefits in paying fee and penalties.
Is there Cash Back on Debt?
Cash back credit cards are definitely not worth it, if you are not responsible with your debt management. Any missed credit card payment will lead to a loss of cash back benefits. Your interest, penalty, and abundant fee charges will be more than what you earn in cash back throughout the month. Even in the amazing world of tax cuts and less regulation this is not something you want to experience.
Credit card companies will always remind you to pay your bills in full each month. However, they also give you an option to pay the minimum balance. Any balance you carry forward incurs interest charges. This is how they make money. High Annual Percentage Rate (APR) means more monthly interest for them.
Cash back credit cards can potentially land you in a vicious debt circle. Credit card companies want you to take up a card with cash back offers because they know from experience how it would increase credit card spending.
They may even send you monthly newsletters encouraging you to spend extra in order to earn more cash back.
However, the moment you start faltering on your payments, high interest costs will take over and cancel out all your cash back rewards.
Hard to Resist Deals
Most credit card companies remind cardholders to enroll quarterly. They push hard to resist deals that remind you to spend, spend and spend more. Factoring in the 5% cash back is the perfect excuse to buy that $2,500 piece of electronic equipment you do not need.
The marketing philosophy behind cash backs is compelling. An average American tends to buy more when they are showered with attractive discounts and the lure of a cash back.
Most cash back credit card companies offer the option to withdraw cash from your credit card. However, this is not a wise or lucrative decision – even more so if you live in high tax states like New York and California where there are even less jobs to boot!
You start accruing interest as soon as you feel the cold hard cash in your hands. There is no cash back on withdrawing cash. The interest could be so high so as to cancel any cash back benefits you would have accrued.
Are the Rewards Worth It?
You can easily get a cash back credit offering cash back to the tune of 1 – 5%. This might seem like a lot on paper.
However, you could be missing out on rewards and loyalty points by switching over to this mode of payment exclusively. For instance, a credit card linked to an airlines reward program is far better than a cash back credit if you fly with the same airlines.
This holds true for groceries as well. You could get better rewards with a supermarket reward credit card when you are loyal to one store. It can be difficult to resist the lure of cash back when compared with intangible loyalty or reward points. However, do the calculation and you will see they are often the better choice.
Make Your Cash Back Spending Useful
Credit card companies keep changing their store partners. So, don’t be amazed if spending benefits at your favorite local grocery store is gone or lowered. It is important to know your cash back cards. You need to stay on top of percentage rates and the products that will get you high cash back.
Many cards come with a high introductory rate that falls away after a couple of months. You need to make sure that you opt for a card that best matches your spending habits.
Cash back cards can be a sagacious option for people who tend to pay their credit card balances in full each month on time.
But it can be very tempting to overspend when you are enamored by the lure of cash back. If you are not confident of your spending habits, you could risk damaging your credit ratings or end up with needless debt and a budget gone haywire.