Whether you’re a frugal shopper or a big spender, a cash back credit card can be a financial game-changer. With the potential to earn money on your purchases, it might seem like an irresistible prospect. But, like all financial products, cash back credit cards have their pros and cons.
In this article, we will discuss whether it’s a good fit for your spending habits and financial goals or not. Your wallet may thank you, or remind you to approach with caution.
Let’s explore together.
What is Cash Back Credit Cards?
Cash back credit cards are financial tools that reward users with a percentage of their spending returned as ‘cash back.’ For instance, if you have a card that offers a 2% cash back rate and you spend $500, you’ll receive $10 back.
There are several types of cash back cards available, including flat-rate, bonus category, and tiered. Flat-rate cards provide the same cash back percentage on all purchases, while bonus category cards offer higher rates for specific types of expenditures like grocery or gas. Tiered cards offer different rates based on the category of spending, but unlike bonus category cards, these rates don’t change.
The Advantages of Cash Back Credit Cards
The lure of cash back is hard to resist, especially when it feels like you’re getting paid for the shopping you would do anyway. But what are the real benefits of these cards that make them so appealing?
Below are the key benefits of using cash back credit cards:
One of the primary attractions of cash back cards is the opportunity to earn rewards on your everyday spending. Whether you’re buying groceries, filling up your gas tank, or making online purchases, you’re earning a portion of that money back. It’s like having a constant discount on every purchase you make.
Cash back cards are typically more flexible than other reward cards. You’re not limited to using your rewards for specific purposes such as flights or hotel stays. Instead, you can typically choose to apply your cash back to your account balance, receive it as a check, or even use it to purchase gift cards.
Easy to Understand and Use
Unlike complex point systems or travel rewards, cash back is straightforward. There’s no need to figure out how much your points are worth or how to best redeem them. You spend money, and a certain percentage of that comes back to you. It’s as simple as that.
Reducing Your Expenses
Every time you swipe your card, you’re essentially getting a discount on your purchase. This ‘discount’ comes in the form of cash back, helping reduce the overall amount you spend. It might not seem like much at first, but over time, these savings can add up significantly, making a noticeable difference to your budget.
Building Credit History
Consistent use of a cash back credit card can help you build a strong credit history. Lenders view regular, responsible credit card use favorably, which can enhance your credit score. But remember, this only applies if you’re diligent about paying off your balance in full each month.
Protection Against Fraud
Most cash back credit cards come with zero fraud liability. This means you won’t be held responsible for unauthorized charges made on your card. This feature provides an extra layer of security, giving you peace of mind as you use your card.
Extended Warranties and Purchase Protection
Many cash back cards offer additional benefits like extended warranties on purchases and protection against damage or theft. These perks, often overlooked, can provide substantial value, especially for big-ticket items.
Helping with Budgeting
Cash back credit cards can assist you in managing your budget. By using your card for regular purchases (and paying it off in full each month), you can easily track your spending. Many cards provide categorized spending reports, giving you a clearer picture of where your money goes each month.
While it’s not advisable to rely on a credit card as an emergency fund, having a cash back card can provide a small cushion in case of unexpected expenses. The cash back you earn can accumulate over time and can be used when you’re in a pinch.
Some cash back credit cards offer a unique benefit that allows you to make a positive impact on society. In addition to earning cash back on your purchases, these cards give you the option to donate your earned cash back to a charity of your choice.
Certain cash back cards come with a range of valuable insurance benefits, designed to provide you with peace of mind and save you money in various situations. From comprehensive travel insurance that protects you during your adventures, to car rental insurance that covers any unforeseen mishaps on the road, and even product insurance that safeguards your purchases against damage or loss.
By having these perks included with your cash back card, you can enjoy the convenience of coverage without having to bear the financial burden out of pocket.
Special Offers and Discounts
Cash back cards, a popular choice among savvy shoppers, frequently collaborate with a wide range of businesses to offer cardholders exclusive discounts and irresistible offers. By taking advantage of these special deals, you can unlock substantial savings on purchases you were already intending to make, allowing you to stretch your hard-earned dollars even further.
The Disadvantages of Cash Back Credit Cards
While cash back credit cards come with a host of benefits, it’s essential to understand their potential downsides too. This will help you make an informed decision and use your card more effectively.
Let’s delve into some of these disadvantages below:
Potential for Overspending
The allure of earning cash back can sometimes lead to unnecessary purchases. The idea of getting a percentage back might make extra spending seem less impactful, but it’s crucial to remember that the best financial strategy is to buy only what you need. Overspending can lead to high credit card balances, which can negatively affect your credit score if not managed properly.
High Interest Rates
Cash back cards often carry higher interest rates compared to other types of credit cards. If you frequently carry a balance from month to month, the interest accrued could outweigh any cash back earned, making your card more costly than beneficial.
Don’t understand what are interest rates, check out our detailed guide on credit card interest rates.
Caps on Earnings
Some cash back cards impose limits on the amount you can earn back. These caps can be based on specific categories or a total spending limit. This means that after a certain point, your spending won’t yield any more cash back, reducing the overall value of your card.
Certain cash back cards come with annual fees. While these fees can sometimes be offset by the rewards you earn, it’s important to calculate whether your expected cash back will exceed the cost of the fee. If not, you could end up losing money instead of saving.
By keeping these points in mind, you can ensure that your card works for you and not against you. Always spend wisely, pay off your balances promptly, and keep an eye on the terms and conditions of your card to maximize its benefits.
Things to Consider Before Getting a Cash Back Credit Card
Let’s take a look at some key things you need to consider.
- Your Spending Habits: This is arguably the most crucial factor. Are you a big spender or do you make just a few purchases each month? More importantly, do you pay off your balance each month or do you carry a balance? If you’re in the habit of paying off your balance each month, a cash back card could work to your advantage. However, if you carry a balance, the interest charges could negate your cash back rewards.
- Spending Patterns: Cash back cards often offer higher rewards for certain spending categories such as groceries, gas, dining out, etc. Analyze your spending patterns to see if they align with these categories. If they don’t, you might not earn as much cash back as you anticipate.
- Annual Fees and Interest Rates: Some cash back cards charge an annual fee. If the fee is high and you don’t spend enough to earn substantial cash back, the card may not be worth it. Similarly, cash back cards can have higher interest rates. If you carry a balance, the interest could wipe out any rewards you’ve earned.
- Reward Caps: Some cards limit the amount of cash back you can earn. If you’re a big spender, you could hit this cap quickly and any additional spending won’t earn you any rewards.
Choosing a cash back credit card requires careful consideration of your financial habits and circumstances. By taking into account these factors, you can choose a card that suits your needs, maximizes your benefits, and minimizes potential downsides.
Cash back credit cards offer numerous benefits, including the chance to earn rewards and greater flexibility. However, they also have potential downsides like high interest rates and the possibility of encouraging overspending.
By understanding these pros and cons, you can make an informed decision that best suits your needs and lifestyle.