What is a Cash Back Credit Card and How Do They Work?
A cash back credit card is one where providers pay a percentage of the amount that the consumer spends on the card back to the cardholder. Who doesn’t love the idea of being paid to do the shopping that you would already be doing? But is there more to cash back credit cards than what initially meets the eye? While there is no denying that cash back credit cards have a lot to offer. If you go into it without doing your due diligence, there is a chance you will find yourself losing money in interest than what you are actually earning back through the cash back rewards program. If you are considering getting a cash back card, please read on to learn more about both the benefits and the drawbacks of these popular credit options.
How Do Cash Back Credit Cards Work?
Getting cash back when you use your credit card is a type of reward system that some lenders choose to offer in order to make their cards seem more attractive and more beneficial to the average consumer. Some of these credit cards promise a fixed amount back as long as you use a card during a specific time window, while others do so on the condition that you transfer a balance – a cash back card is slightly different. A cash back credit card is where you get back an agreed percentage of the money you spend back.
It is crucial to acknowledge that not all cash back credit cards offer the same percentage back, nor do they offer deals within the same time windows. For example, some cash back cards provide a higher rate back during the first few months that you have your card. Other cards operate on a tiered system. These systems generally allow you to access a higher percentage of cash back each time you hit a new tier of spending. Some providers even offer cash back percentage rates that are based on your purchases.
Now, before you start making a mental shopping list of everything that you are going to buy with your potential rewards, it is worth noting that your cash back earnings will be capped on either a monthly or annual basis. Because of this, as with the majority of financial products, it is crucial that you do your research and finds one that lines up with what you actually need. It should also be noted that regardless of which cash back card you choose the money that you do receive back will be tax-free.
Incentives and Cash back Credit Cards
With terms and conditions that can include minimum monthly or yearly expenditures, introductory rates, and a tiered cash back system, it is essential that you take the time to do a thorough and accurate analysis when comparing cash back credit cards.
In addition to doing your due diligence as to which cash back cards will suit your spending best, you may also want to take a look at where they will be work. Both Amex and Mastercard offer cash back credit cards that are available with a variety of cash back rates, however, but Mastercard is accepted in many more locations.
Benefits of Cash back Credit Cards
- Many options in terms of cash back opportunities (tier, percentage..etc…)
- With so many on the market, customers are able to choose from a wide array of options, including cards that pay more for specific stores and products.
Drawbacks of Cash back Credit Cards
- Often customers end up spending more than they usually would, therefore accumulating more debt, in order to get that cash back deal.
- Many customers do not realize that if they fall behind on their payments, they are not only putting their credit at risk, but they are also breaking the terms and conditions of their contract with the credit card company – which means they may not be eligible for the cash back reward at all.
How to Choose the Right Cash back Card for You
Whenever you are on looking for a new financial product, it is absolutely essential that you do your research – and that is definitely the case with a cash back credit card.
One of the most important things that you can do when searching for a new financial product is to compare the products APR with those of the other products that you are considering. In this case, you will want to check what the long term APR is on the various cash back cards that you are looking at. Now, if you pay your bill off entirely and on time each month, you won’t need to worry about paying that interest. Generally, the rates of cash back cards are quite high. This means that if you do not pay off your card entirely, and on time each month, you will be paying a significant amount in interest, canceling out the cash back that you receive.
Cash back Credit Cards and Your Credit Score
The reality is that at some point or another, you are going to have to pay some extra attention to your credit score. Good news – some lenders do offer cash back cards to patrons who have to improve or build up their credit score. These are often referred to as cash back credit builder cards, and they often come with lower cash back rates. In other words, if you find yourself in this position, you can still take advantage of the benefits that go along with cash back credit cards, while improving your financial status. That said, it is vital that you remember that you are better off paying off any debt prior to getting yourself started with a cash back card. This is due to the fact that interest on that debt is likely to outweigh the benefits of spending money on a cash back card, and only getting a small percentage back.
Another huge factor for customers to keep in mind is that if you are planning on taking part in any significant financial decisions that might involve your credit report being pulled, such as a mortgage or a new car loan, then you might want to try and space out these as well as your cash back credit applications. However, if that is not an option, be sure to run a soft search as it will help you find something that’s a good fit without leaving a mark on your credit file.
How to Maximize Your Cash Back Earnings
In order to get the most out of your cash back earnings, there are a few things that you can do. First, you could use your cash back card to pay for work expenses – as long as it is done within your workplace regulations. Another thing to keep in mind with this option is that you would also have to shoulder the cost of your card payment while you wait for reimbursement from your company.
Another excellent option for anyone who is planning to purchase a more significant ticket purchase, like a piece of furniture, or a holiday, you can use your cash back card to pay for it and then use your savings to clear the balance later.
By doing some of these things, you will be in a position to receive both cash back plus consumer protection – all for something that you were going to buy anyway. Of course, it is essential that you make sure that any charges that you accrue by paying by card do not negate your cash back earnings.
So, Are Cash Back Credit Cards the Best Option?
When it comes to deciding what the best option is for you, there are a number of things to consider. Can you handle the higher APR than a lot of other credit card types carry? Would another kind of credit card, such as one that offers travel rewards, help you achieve your goals in a more timely manner? As stated earlier, one of the easiest ways to choose a card – regardless of what kind of rewards it offers – is to compare them point for point.
To find the most ideal cash back credit card, you will have to take some time and think about what is relevant to you and your financial goals. For example, are you seeking cash back to help save for a rainy day? Or for free groceries? Would you rather have the opportunity to spend cold hard cash any way you want? Whatever you choose payment back credit cards are a fantastic way to capitalize on day-to-day purchases, such as groceries, gas, and miscellaneous items, that have the ability to add up to big-ticket items over time. By using a cash back credit card that offers 4% cash back on these purchases, you will have the ability to save and earn several hundreds of dollars each year. Or if you are just starting out, cash back cards that have no annual fee and low annual income requirement can be a fantastic choice. Unlike airline travel rewards credit cards, which let you redeem points that are subject to specific blackout periods and restrictions, a cash back credit card is by far the easiest, and most direct way to capitalize on your regular, daily spending.