How to Win the Cash-Back Credit Card Game
Written by Curtis Arnold
Posted On: September 18, 2008
An excerpt from How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.
A little extra cash in your pocket sounds great, doesn't it? Maybe you could use it for a nice dinner out on your birthday, a movie night out with that special someone, a rainy-day shopping spree, college savings for you or your child, or even a way to pay down your debt. For all these reasons, and thousands of others you can dream up, a cash-back credit card might be the perfect fit for your wallet.
Cash-back credit cards are fairly straightforward, and, in my opinion, they're the simplest type of reward card to use. You usually get a credit to your account, ranging from 1% to 5% of your spending. Some cash-back cards, like the one in my wallet, give automatic credits on a regular basis. A few cards send you an actual check in the mail.
Cash-Back Credit Cards Are Great If...
...you don't carry a balance from month to month. Credit cards that offer cash rebates tend to have a higher interest rate, which usually wipes out any reward you might receive if you carry a balance. If you don't pay off your bill every month, use a credit card with the lowest interest rate you can get.
Dr. Mary Ann Campbell (CFP), president of Money Magic, Inc., and a money educator, sums it up best: "Cash-back is a good option if you are truly managing your credit cards so you are literally earning that cash, and not turning around and paying it back in any other form."
Use your rebate card wisely and pay off the balance in full every month. Then the cash you receive is a reward, pure and simple, for all the hard work you've done in managing your card responsibly.
You Don't Carry a Monthly Balance But...
...not all cards are created equal, either. As with any other type of card, you should definitely shop around. Ideally, pull out your calculator to determine the best reward card, given your spending habits and lifestyle. Consider it a wise investment of your time, with the payoff being more money. You'll also get peace of mind from knowing that you've done some profitable decision making. (The "Consumer Reviews" section of CardRatings.com is a good place to start because the site enables you to conveniently search for cards by reward types.)
Here are some other things to keep in mind when reviewing offers:
Is There an Annual Fee?
Paying an annual fee is a pet peeve of mine, particularly when it comes to cash-back cards. But because only a few cards out of the hundreds and hundreds available charge an annual fee, you shouldn't have to settle for one that does. If a card with an annual fee seems too hard to resist, it's time to crunch some numbers and compare the benefits to those offered by other cards that don't have an annual fee.
When comparing benefits, be realistic about which ones you'll actually use. If a card with a $200 annual fee offers a generous perk, such as free international companion airline ticket every year, but you'd never use it, then that perk isn't worth a dime to you! Rarely does the math add up. The one notable exception, which we discuss in Chapter 8, "Use Targeted Cards to Your Financial Advantage," is a relatively new breed of cards that targets affluent card members.
Does the Card Require You to Carry a Balance?
A few cards offer you a greater rebate percentage or some other freebie if you carry a balance. A typical example here is a card that offers 1% rebate on all purchases but increases that rebate to 2% in any month when you carry a balance.
This scenario should be a big red flag. Any interest that you pay to get a more generous rebate will invariably cost you much more than the amount of cash you get back. Paying 15% interest on your balance for the privilege of earning an extra 1% rebate is a good way to end up in a pauper's prison.
If you're considering such an offer, start with you annual spending level (how much you'll charge during the year). Figure out how much you'll pay in interest charges and fees, and note how much cash you'll get back. I'd be shocked if you actually ended up receiving more cash than you'd pay in interest and fees. (Please let me know if you do!) Be sure to compare your findings to other offers to determine which one gives you the most back.
For more tips on finding the best cash back credit card, and other valuable credit card tips, check out Curtis' new book, How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line.
Curtis Arnold, a nationally recognized consumer educator and advocate, has been educating consumers about credit cards since 1998. New! Curtis is the author of "How You Can Profit from Credit Cards: Using Credit to Improve Your Financial Life and Bottom Line" (FT Press, 2008). He is also the co-author of the upcoming Complete Idiot's Guide to Person-to-Person Lending (Alpha Books/Pengiun Group USA, April 2009), a contribitor to The Ultimate Allowance (InnerWealth Publishing, 2008) and is extensively featured in 42 RulesTM for Driving Success With Books (Super Star Press, January 2009).