Ever been enticed by a cash back or rewards credit card offer? Currently using one? Then it's a good idea for you need to read this. First, let me explain the difference between these credit card types -
Cashback vs. rewards credit cards
Cash back and rewards credit cards are pretty much based on the same idea - you get something back when you spend money using your credit card.
The main difference between the two is that with cash back credit cards you get a percentage of the money you spend on a specific category back e.g. 2% cash back on gas or 1% cash back on groceries etc while with rewards cards you get some sort of rewards e.g. points or gift cards etc
Are cash back & rewards credit cards a good idea?
The thing about cash back and rewards credit cards is that they might seem like a perk to the cardholder, but they are also a strategy that credit card companies use to get cardholders to spend more money.
"The thing about cash back and rewards credit cards is that they might seem like a perk to the card holder, but they are also a strategy that credit card companies use to get card holders to spend more money."
Let me explain - If you are motivated by an incentive i.e. cash back or rewards points, you are more likely to shift to your focus to wanting to obtain as much of the incentive as possible, which in turn can lead to overspending especially on what you might consider low cost or cheap items which in the long run adds up.
This strategy is beneficial to the credit card companies because it allows them to make money from interest accrued on credit card balances that are carried over as the cash back & rewards they offer are typically much less than the accrued interest when you compare the two.
If you are one of those people carrying a balance on your credit card from month to month, then you actually lose out big time because, despite the incentive you've gained, you are paying way more than it's worth in accrued interest.
How can you use cashback & rewards credit cards to your benefit?
When it comes to using a credit card that offers cash back or rewards for your day to day transactions, it's important to plan out your spending by using a budget.
This way you know exactly how much you can afford to spend in order to pay your balance off in full each month and you can resist the temptation to overspend just to get cash back or reward points that you could end up paying dearly for by the way of interest fees later on.
What about credit cards with 0% introductory offers?
Some credit card companies might offer an additional incentive with their cash back cards by advertising 0% interest for an introductory period of time. Before you take them up on that offer, be sure to ask about annual fees and what the interest rate will be after the introductory period is over.
Chances are if you carry a balance from month to month, once the introductory period is over, you'll be paying back those cash back rewards and then some in the form of interest and possibly annual fees too.
Do you use cash back or rewards credit cards? Are you using them to your benefit? Love them or hate them? Leave a comment below!