Cash back credit cards are cards that give you a portion of the money you spend on the card back in cash. This cash back may come at the end of each statement or it may come in the form of a check, depending on the terms of the card. The percentage of cash back you can receive usually varies depending on exactly where you use the card, but you can usually expect a minimum of getting back 1% of the total of your purchases.
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Why Do Creditors Offer Cash Back Credit Cards
Cash back credit cards work by giving you a portion of your monthly spending back. Credit card companies offer cash back for several reasons. First, it may help them to lure customers. Customers often choose credit cards based on rewards and other perks, and a cash back credit card may be just the ticket to help a creditor woo a customer.
Second, offering cash back encourages customers to use credit cards more often. A customer who has a choice between paying cash for something or using a debit card or using a cash back card may always choose the cash back card because they feel that they are getting something back on their purchase. This is great for creditors, since their card gets used and they usually get to charge a transaction fee to the merchant. It is also a good business decision for creditors because many customers will use the cash back card and then not be able to pay the balance in full each month, so the credit card company will make money on the interest.
Never the less, cash back rewards are almost like free money for the responsible consumers. Here are a few cards that are worth having:
How Do Cash Back Credit Cards Work
Cash back credit cards tally the amount of money you spend in a given period on eligible purchases. Many cards offer cash back only on select items, or within select categories. For example, it is common for the cash back card to offer between one and three percent cash back on groceries, drug stores or gasoline purchases. Some cash back cards target only one specific area for cash back, touting themselves as the best card for those who make business purchases or the ideal card for people who drive a lot. Some customers will get several cash back cards and use each one to buy the items they get the biggest rewards for. This idea is OK, but remember that if you open a lot of credit cards, you may hurt your credit score.
Other cards will offer you cash back on everything, but this is usually a lower rate – around one percent, instead of a special card that offers you three percent but only on groceries and gas purchases. Still others offer you combination – one percent cash back on general purposes and a special promotional rate on “category” purchases.
Some cards will cap the amount of cash back you can earn, setting a maximum for the year. Others will allow you to earn unlimited cash back. Make sure you read and fully understand the terms and conditions of the particular card you are interested in to know what purchases you are rewarded for.
A Little Gotcha on Some Cash Back Credit Cards
Cash back usually comes in the form of a credit on your statement. You have to read carefully, but sometimes the credit is deducted from the total that reduces your total of cash rebate that you receive. Let me give you an example of what I mean. Let’s say the cash back reward on your card is 1% on everything you buy. If you buy $10,000 worth of goods every month, then the calculation is easy, as you get $100 back each month right?
Not so fast.
What ends up happening with some credit cards is that on month 1, you make $10,000 in purchases. Then in month 2, you will see a credit of $100 along with your $10,000 in purchases. So far so good. But in month 3, they will deduct the $100 from $10,000 and calculate your 1% based on $9,900, netting you only $99. This may or may not seem like a big deal to you, but since I rather have more money than less, I always ask for a check if that’s an option.
Using Cash Back Cards Wisely
There are a few things you should consider when selecting a cash back card or making purchasing decisions. First, you typically don’t want a cash back card with an annual fee. There are plenty of free options out there, and the fee may eat away at any savings or profits you might make from the cash back offer. Second, make sure you check your interest rate. You usually do not want to have an interest rate that is higher then the industry average, especially if you carry a balance. Compare the rates on a few cards, both those that offer rewards and those that do not, to determine which will be the best deal in your situation. In general, those who carry a balance shouldn’t look for a cash back card. Instead, a 0% balance transfer credit card might be the ticket for them.
You should also compare rewards programs before selecting a cash back program and think about your needs. If you travel frequently, a mileage card may offer you a better return on your money than a cash back program in the form of miles. Typically, cash back programs give you less than a mileage card or other point-driven program because, when giving cash back, the creditor actually has to give you the full dollar value. Calculate how much you spend on average per month and figure out what this means for cash back versus mileage rewards points before getting a card. You can also look into other types of rewards programs which may offer other incentives that are better suited to your spending needs.
Finally, don’t fall into the trap that just because you are earning cash back, it is always a good idea to use your credit cards. If you carry a balance or can’t afford something, the interest on the purchase will still often be far higher than what you are making on a cash back credit card. Do not be tricked into thinking you are saving when you are not. You still must spend wisely and use credit responsibly in order for a cash back card to be a good deal. If you are able to be responsible and pay off the balance in full each month, then a cash back card may be a great option for you. You may even wish to use your cash back card to pay for large purchases like rent if your landlord offers that service, as you can earn large amounts of cash rebates over the course of the year for expenses that you would be incurring anyway.
If you decide a cash back reward credit card is right for you, make sure you find one that gives you the best percentage back in the categories you spend the most in. You can track your spending for a few months and then compare offers to find the best deal.
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