Ever been enticed by a cash back rewards card offer? Currently using one? Then it's a good idea for you need to read this. First, let me explain the difference between two key types of cash back rewards credit cards.
Cash back vs. rewards credit cards
Cash back cards 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. For example, you might get 2% cash back on gas or 1% cash back on groceries. Rewards cards offer you some sort of rewards, like points or gift cards.
Are cash back or rewards credit cards a good idea?
The thing about cash back rewards cards is that they might seem like a perk, 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, 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, like cash back or rewards points, you are more likely to shift your focus to wanting to obtain as much of the incentive as possible. That can lead to overspending, especially on what you might consider low cost or cheap items. But in the long run, those can add up too.
This strategy is beneficial to the credit card companies because it allows them to make money from interest accrued on credit card balances. And since the cash back rewards they offer are typically much less than your accrued interest, they almost always win 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 cash back rewards 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 in 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 rewards 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 in annual fees too.
Do you use cash back rewards cards? Are you using them to your benefit? Love them or hate them? Leave a comment below!
P.S. Here's a breakdown on different types of rewards cards!