Exploring the Intricacies of Cash Back Credit Cards

This article is brought to you by Michael from CreditCardForum.com, where the focus is on discussions about credit cards. Michael specializes in reviewing and ranking the best cash back credit cards and today, he wants to help us understand how credit card rewards programs work.

Back in the 1970s and 1980s, rewards from credit cards were a rarity. Fast-forward to today, and it’s hard to find a card that doesn’t offer some kind of rewards program. In my experience, at least 70% of US credit cards offer rewards that are worth 1% or more, such as 1 point per dollar or 1% cash back. Some even give up to 5% cash back on certain purchases. But is this “free money” really as great as it seems?

There are quite a few terms and conditions that come with these rewards programs. If you’re considering a credit card with rewards, here are a few things you should watch out for:

Spending Levels: Take, for example, the American Express Blue card. It promises 5% cash back on gas, groceries, and drug stores, and 1.5% on everything else. However, the fine print reveals that you only get these rates after spending $6,500 in a year. Until you hit that threshold, you just earn 1% back on those categories, and only 0.5% on other purchases. Make sure to check out these spending requirements.

Limits on Rewards: Credit cards offering 3% to 5% cash back in a particular category cost banks money. They recoup this from people who don’t pay off their monthly balance. If you’re like me and don’t carry a balance, these programs aren’t always profitable for banks, so they often cap the rewards you can earn. In my review of the Chase Freedom card, I found that their 5% cash back offer is limited to the first $1,500 spent quarterly in those categories. Once I hit that cap, I switch to another card to keep getting high cash back.

Increased Interest Rates: These high rebate cards aren’t big money-makers for banks, so they usually come with higher than average interest rates. It doesn’t make sense to carry a balance on them. Even with a 5% cash back offer, if you’re paying 15% to 20% in interest, your gains can quickly disappear just by maintaining a balance for a couple of months.

Annual Fees: Many premium cash back cards have an annual fee. You’re essentially paying to earn rewards. If you spend a lot, this might be okay, but if you’re not planning on big purchases, make sure you compare the potential annual rewards with the fee you’ll pay.

Expiring Rewards: Don’t forget to cash in on your points or rewards before they expire. After reviewing many credit cards (like the Chase Freedom card), I’ve found that rewards generally expire 36 months after they’re earned. However, some cards might have shorter expiration periods, like just 12 months.

To sum up, cash back credit cards can definitely help you save on purchases. But you need to pay attention to the little details to really take advantage of the benefits they offer.