Cash back credit cards sound like a great deal, giving you money back off everything you spend. What’s the catch?
There are hundreds of cards available for the canny consumer to choose from. Each bank tries to make its own offering unique by marketing. Sometimes the marketing might involve making the card a bright pink or a metallic gold effect, other times it might involve offering points with a given retailer or even offering cash back on everything you spend.
What’s Your Self-Discipline Like?
These cards can save you 2% on every penny you spend, but, you do still need to remember that the statement that arrives each month is really a bill, which needs to be paid in full. Banks never refer to their credit card statements as bills, but that is how every card-holder should think of them. The bank makes more money by encouraging you to think of the bill as a statement that allows you a partial payment option.
You can save 2%, but if you let the bill roll over and only pay part of what you owe then that 2% will soon be swallowed up in interest charges.
Is it Worthwhile?
I bought a new car on my card, £6,995. My credit limit was £9,000 at the time and I hCredit: http://www.freedigitalphotos.net/ad a cashback credit card at the time. I had a bank loan arranged, but I paid on the card to get £140 cashback. I then repaid the card with a cheque from my bank account. The garage had never had anyone pay for a car on Visa before and I had to answer authentication questions over the phone, which was fair enough.
In the course of a normal month’s spending on petrol, food and clothing the cash back is much smaller, £20 on a £1,000 monthly expenditure; significant but hardly life-changing.
What’s the Catch?
There are two downsides to cash-back cards; that you spend too much money and the interest rate may be higher.
It is tempting to knock off the 2% mentally whenever you spend anything, and to count it as money you will be getting back, meaning that you are allowing a 4% deduction on every purchase. You really need perfect financial discipline to make all of your monthly spending on your credit card. It is very easy to spend the money you have in the bank, meaning that the card is the only option you have.
Moving back to paying cash for everything becomes impossible once you have spent that buffer amount that was in your bank account. In the first month of paying cash you would have to pay off the card bill and pay cash for everything.
Almost every card includes an interest-free period from purchase until statement date and then interest is only added if the bill/statement is not paid in full by the given date. Make sure that any cashback card still has this interest-free period because it makes no sense having 2% cashback if you are paying interest from the date of purchase.
The other crunch of higher interest rates cuts in if you ever fail to pay the bill in full by the due date. This will happen, believe me, and when it does even the top cashback card becomes a poor option compared to cash.
Is a Cashback Card the Best Option?
Most people need a credit card of some description. If you find financial self-discipline difficult, then any card that encourages you to spend more on it rather than in cash could lead to credit card debts enough to drown you within a few years.
If you are perfect, and always put aside cash whenever you charge something to your card then and only then does any credit card make sound financial sense.