According to a recent article on Mint.com, “In Rewards Cards’ Terms, How Much Really Is 5% Back?,” the answer is a resounding, “No.” Cash-back programs offer to pay back credit card users a certain percentage of their spending, usually 1-5%. Sounds too good to be true, right? Who wouldn’t want to get cash back for stuff they were already going to buy? For most of us, cash-back credit card offers are precisely that: Too good to be true. Here’s why…
Their Cash Comes With a Catch
Credit card companies lure you in with enticing offers of free money, but reading the fine print reveals that many of them offer cash back only for specific purchases, such as groceries or drugstore items. Moreover, some cards set limits on the maximum amount for which they’ll return a percentage. Getting cash back for purchases of up to $1,500 may sound like a lot, but do the math and you’ll find that the returns max out at $20 per month.
There’s No Cash-Back on Debt
While credit card companies may remind you it’s best to pay your bill in full each month, what they really love is for you to carry a balance. That’s how they make their money; and the higher the APR on your carried balance, the more interest they earn. Cash-back cards entice card users to make more purchases to get a greater return as a reward. But as soon as you stop paying your balance in full the interest on your debt will cancel out any rewards you may have earned.
Spending More Doesn’t Equal Saving More
Even for those who dutifully pay their credit cards in full each month, it’s hard to deny the allure of cash back. Credit card companies require cardholders to re-enroll in rewards programs quarterly, offering fresh reminders to spend, spend, spend each time they log on. For many of us, factoring in the 5% back is the perfect excuse to buy that pair of $150 jeans—or piece of $1500 electronic equipment—we don’t really need.
The bottom line: If you pay off your balance every month and have the self-control to use a cash-back card only for purchases you’d be buying anyway, rewards programs are for you. Everyone else, beware.
For more on the cash-back Catch-22, go to mint.com.