What You Need to Know to Make the Most of Cash-Back Cards

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 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 the thousands of others you can dream up, a cash-back credit card might be the perfect fit for your wallet.

Cash-back 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.

I love simplicity. So as you might have guessed, because of this and several other reasons that we discuss in this chapter,
cash-back cards are my favorite type of reward card.

What Type of Reward Card Do You Prefer?
Based on a 2007 online poll conducted by CardTrak LLC, 56% of Americans prefer cash-backcards while 23% said they favored air miles. Approximately 12% preferred points while only 9% selected automatic rebates or discounts as their favorite rewards.

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: “Cashback 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.

Wonder How Credit Card Companies Can Afford It?
They can afford to send us cash rebates because lots of people mess up by carrying balances and paying late. Aside from all the interest they earn and the fees they collect, card issuers charge merchants a fee on every credit card transaction, typically between 2% to 3%. So. even if you pay your balance in full each month (and are therefore a “deadbeat” in the industry’s jargon), your card company is still generating fee income from your spending!

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 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 good to resist, it’s time to crunch the 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 a 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 discus 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 a 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% in 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 your annual spending level (how much you’ll charge during the
year). Figure out how much you’ll pay in interest 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.

Five Tips for Making Cash-Back Cards Work for You
1. Carefully review reward program rules.
2. Never carry a balance.
3. Charge everything, but don’t blow your budget.
4. Keep up with your rebate on a monthly or quarterly basis.
5. Maximize your rebate based on your spending patterns.

Posted in: Chapter 2