A cash-back credit card can result in 5 percent or more back on your purchases, essentially giving you a small discount for everything you buy with a credit card.
But that perk can cost you some money in the long run, if you’re not careful. Here are some mistakes to avoid with a cash-back credit card:
Spending to Earn More
Buying something for the sake of earning more cash back rewards is wasted money. If a purchase is unnecessary, then doing it just for the rewards is equally unnecessary.
Why spend money to earn a little money back? Most of the purchase price won’t be returned anyway, with 1 percent cash back being the norm. Even at 5 percent in rewards, that leaves 95 percent of the purchase price you spent on something you don’t want or need.
High Annual Fee
A cash-back reward is essentially a discount on a purchase. If you’re going to buy gas and groceries anyway, you might as well get 5 percent cash back on them if you can. But take into account the cost of an annual fee, as it can take a few thousand dollars in spending per year to earn enough cash back to make up the cost difference between a fee and no-fee card.
If a cash-back credit card has an annual fee of $75, for example, and pays 5 percent cash back for grocery store purchases, it would require spending $1,500 to get that $75 fee back. That’s a lot of groceries to buy before getting money in your pocket.
Paying Interest
Your cash rewards will be useless if you don’t pay off your balance in full each month or on time and incur interest. People who pay interest each month are often charged a higher interest rate on their cash-back card than on a credit card with no rewards. If you regularly carry a balance on your credit card, look for a card with the lowest interest rate instead of one with rewards.
Incurring Transaction Fees
Private retailers, government entities and public utilities sometimes charge a transaction fee to consumers who use a credit card. This fee can easily exceed the cash back you’d get on a rewards card. Credit card companies don’t allow many businesses to charge a fee for using a credit card, though the business cost can be passed on through higher prices or a minimum charge. Ask if there’s a fee before you swipe.
