Guide to Credit Cards: Cash Back Credit Cards
We've seen that credit cards that give you rewards of goods and services aren't always the best choice. They can effectively force you into buying something you otherwise wouldn't have bought, because they restrict your rewards to specific items. Getting a $200 air ticket isn't worth $200 to you if it's not on the day you want to fly or the destination you want to fly to.
Worse, credit cards that give you rewards can actually end up costing you more. You may get a discount on an item, but have to pay some proportion of the cost yourself. In that case, you might actually end up spending more than you would without the rewards, if otherwise you wouldn't have purchased the item at all. Bottom line: credit cards that give you in-kind rewards and discounts often don't help you to save. They may actually encourage you to spend more.
That's why for many people the best type of credit card is a cash-back credit card. Cash-back cards pay you in cash a percentage of the amount you spend.
But finding the best cash-back credit card isn't as easy as it seems. Here's what you should be looking out for:
The cash-back rate. The cash-back rates on credit cards range from 0.25% to 5%. Some credit cards offer higher rates for certain types of purchase, such as gas or groceries. If a large proportion of your credit card spending goes on these items, find a card that pays a higher percentage cash-back for them.
Cash-back ceiling. Some cash-back credit cards cap the amount they pay in cash back. For example, in July 2004 Citibank offered a cash-back card with 5% cash back on purchases from gas stations, supermarkets and drug stores. But the cash back on the card is capped at $300 per year. That means that if you use the card exclusively for groceries and gas, you'll receive no cash back once you have charged $6,000 to the card.
Tiering. Many cash-back credit cards advertise their higheest cash-back rate, but the small print tells a different story. With some cards, the cash-back rate rises the more you spend, but starts at low levels. Lower tiers of spending, say the first $1000 on the card, pay hardly any cash-back. Higher tiers pay more. You should only get one of these cards if you plan to charge enough to the card for the higher top tier rate to compensate you for the lower tier rate.
Cash-back contingent on borrowing. This is a truly terrible deal. Some credit cards pay you their advertised cash-back rate only if you "carry a balance", ie. borrow money from the credit card.
Lumpy payments. Some cash back cards pay you only when your cash-back reward reaches a certain level. Discover cards, for example, pay you cash back in increments of $20. If the cash back rate is 1%, that means you have to spend $2,000 before you receive anything. Lumpy payments also tie you to a card, and prevent you from switching to a better card if one becomes available.
Delayed payments. Credit card companies that offer cash-back credit cards often try to delay payment of your cash-back bonus. Some credit cards pay the cash back bonus at the end of a year. Others require you to claim the bonus by calling the card company. Some credit cards pay your bonus by mailing you a check (which you then have to cash) instead of crediting your account with the bonus immediately. We view all these features as attempts to delay the payment of cash-back bonuses and keep you tied to the card in question.
The ideal cash-back credit card pays a single, high percentage of cash-back on everything you charge, and credits the cash back bonus to your account in the following month, with no minimum. But in practice, it's hard to find the ideal card. You'll have to shop around for the features that will best benefit you.
Start by determining (1) how much you expect to charge during the next year, and (2) where you spend most money. Then try estimating how much you'll earn with various cards.
Don't reject cards out of hand, as you may be surprised. For example, one American Express Card has tiered cash-back levels and pays the highest tier only if you "carry a balance". True, you should never carry a balance on a credit card, so you'll never hit the top cash-back tier. But if you expect to charge a lot to your card, then a tiered card may make sense as you'll spend enough at the higher tiers to outweigh the lower cash-back rate at the lower tiers. You also won't mind if your bonus is only paid to you in lumps, as you'll expect to amass a large cash-back bonus rapidly. So check out as many cash-back cards as you can, but remember to read the fine print carefully.
Next, we'll look at store credit cards.
Comments
How can one avoid surcharges on overseas charges?
I've had terrible luck with credit card rewards. Somehow, my cashback becomes points and I can't redeem them for anything but magazine subscriptions, or I can't reach the $200 reward threshold needed to redeem them.
Do you have any idea what cards will just automatically credit your statement every month? So if I spend $2000, it will charge me $1980?
I've read the discussion of the chase perfectcard on this site: katiescredit.com/6-rea.../
It seems like it's exactly what I want, so I'm thinking of signing up. What do you think? I expect to be able to get the 1%-6% cashback.
I definitely don't want to carry a balance. Why would anyone use a cashback card if they do? It totally negates the cashback. And their APRs are higher. Definitely cashback is for people who do not carry a balance and pay off in full.
I've had terrible luck with credit card rewards. Somehow, my cashback becomes points and I can't redeem them for anything but magazine subscriptions, or I can't reach the $200 reward threshold needed to redeem them.
Do you have any idea what cards will just automatically credit your statement every month? So if I spend $2000, it will charge me $1980?
I've read the discussion of the chase perfectcard on this site: katiescredit.com/6-rea.../
It seems like it's exactly what I want, so I'm thinking of signing up. What do you think? I expect to be able to get the 1%-6% cashback.
I definitely don't want to carry a balance. Why would anyone use a cashback card if they do? It totally negates the cashback. And their APRs are higher. Definitely cashback is for people who do not carry a balance and pay off in full.
sorry for doubleposting. I accidentally double clicked on submit comment.