The following is a guest post by Michael from CreditCardForum.com – a message board and blog about credit cards. He regularly rates and reviews the best cash back credit cards. In this post, he will discuss some of the fine print that goes with these credit card reward programs.
Back in the 70’s and 80’s, very few credit cards came with rewards. Today, almost every card on the market comes with some sort of a rewards program. In fact, I would estimate that at least 70% of the credit cards in the U.S. give 1% or more in rewards (1 point per dollar or 1% cash back). Then of course there are cash back credit cards that give even higher rewards, up to 5% cash back, on certain categories of spending. But are these programs that give us “free money” on purchases too good to be true?
The truth of the matter is that these reward programs do come with a lot of fine print. Here are some things you need to pay attention to when it comes to these types of credit cards:
Spending Tiers: The American Express Blue card advertises 5% cash back on gas/groceries/drugstores and 1.5% cash back on everything else. But if you read the fine print, you will discover that you only earn that amount after spending $6,500 in a calendar year. Before that, it’s just 1% on those three categories and one-half a percent on everything else. So be on the lookout for the these spending tiers when choosing a card.
Capped Rewards: When a credit card gives you 3% to 5% on a given category of spending, the bank is actually losing money. Their hope is that you will carry a balance so they can charge you interest to make up for those generous rewards. However there are many people – such as myself – that never carry a balance… so these reward programs aren’t always profitable for them. To limit their potential losses from customers like me, many cash back credit cards limit the amount you can earn. For example, in my Chase Freedom card review, I mention how the 5% is only given on the first $1,500 spent per quarter in those categories. After I spend that amount, I alternate to another card from a different issuer, so I can continue to get the higher rebate on my spending.
Higher Interest Rates: As mentioned, the best cash back credit cards (those with the highest rebate) aren’t money makers for the bank. Because of this, the interest rate on these cards is usually above-average. For this reason, it makes absolutely no sense to carry a balance on them. Even if you did get 5% cash back, if you’re paying 15% to 20% interest you will wipe out your gains simply by carrying a balance for a few months.
Annual Fees: Some of the best cash back credit cards on the market also come with an annual fee. That means you are basically paying money to make money. If you’re a big spender it might be worth the cost. But if you don’t plan on spending much, make sure you calculate out the potential rewards you would earn over the course of a year and weigh them against the annual fee before you apply.
Expiring Rewards: Last but not least, make sure you redeem your points or cash back before it expires. I have done hundreds of reviews (like my Chase Freedom card review mentioned above) and on most of them, I have found that rewards typically expire 36 months after they are earned. That being said, there are cards on the market that have shorter expiration dates… sometimes they expire in as little as 12 months!
In summary, cash back credit cards can be a great way to save a little money on your purchases. However, if you don’t pay attention to the fine print, you may not come out ahead.