Advertised as a hassle-free alternative to the nebulous “points” you get with an airline card, cash-back cards are often regarded as a low-fuss rewards option.
“Cash doesn't have a blackout date and no one gets confused about the value of a dollar the way they can sometimes get lost in the complexities of airline miles and points,” says John Ulzheimer, consumer credit expert with money management and analytics website CreditSesame.com. “And cash is universally usable.”
Still, cash-back cards come with their share of “pitfalls and complexities” that stand between you and the money, Ulzheimer says.
If you're thinking about signing up for a cash-back card, these five tips will help you boost its benefits.
1. Don't spend for the sake of spending
The biggest risk that comes with cash-back cards is the temptation to spend more, Ulzheimer says. The notion of getting a kickback on every dollar you spend could trick you into putting more items in your shopping cart.
“Credit card issuers use cash back as an incentive for you to pull their card out of your wallet when making a purchase,” Ulzheimer says. “But if you're charging more than you normally would just because of the cash you get back, you're diluting the value of the reward.”
One way consumers typically fall into this trap is through sign-up bonuses sometimes offered to new credit card customers, according to Beverly Harzog, credit expert and author of “Confessions of a Credit Junkie.” For instance, Capital One's Quicksilver card allows you to earn $100 if you spend $500 within three months of activation.
“Sign-up bonuses can sometimes look like big, shiny baubles, and people get stars in their eyes at the thought of so-called 'free money,'” Harzog says. “And they want it in a hurry.”
To avoid getting lured into extra spending, try to align your sign-up bonus with a planned large purchase.
2. Check the annual fee
There are plenty of cash-back cards that don't charge an annual fee. However, some cards do (in exchange for accelerated rewards earnings), and it's important to consider whether the fee is worth the perks.
“A lot of people immediately think annual fees are a bad thing, but they're really not, provided you're doing the math and making sure it comes out in your favor,” says Matthew Goldman, CEO and co-founder of Wallaby Financial Inc., a company that has developed a smartphone app to help consumers maximize their cards' rewards.
For instance, Goldman likes the American Express Blue Cash Preferred card. Sure, it comes with a $75 annual fee, but cardholders earn 6 percent ($360) cash back on up to $6,000 in grocery charges each year (after that, the cash-back reward drops to 1 percent). That's double the rate of the no-fee version of the card.
The high cash-back rate makes the card stand out, “but it's still not for everybody,” Goldman says.
“If you're a single 22-year-old and don't really do much grocery shopping, that's probably not the card for you, and that $75 annual fee may cost you more than its worth,” he says. “But if you're regularly shopping for a family of four, that $75 fee is a small price to pay.”
3. Roll with the rotating categories
Card issuers know that certain times of year lead people to make certain types of purchases, which is why they often offer three-month bonuses in changing spending categories.
For instance, between Oct. 1 and Dec. 31, Chase Freedom Visa cardholders can earn 5 percent cash back on up to $1,500 spent at Amazon.com and select department stores. Discover is offering 5 percent cash back on purchases made with the Discover it card at various online retailers. Compare that to the cards' regular 1 percent cash-back rate.
But these types of deals often come with a catch: Cardholders must remember to sign up for the rotating benefits every quarter.
“Personally, I can't stand rotating spending categories,” says Ulzheimer. “I just don't want to be constantly worrying that I forgot to sign up for the rewards that quarter.”
That said, many issuers make it easy for consumers to remember to sign up, whether through email reminders or even text messages. What's more, Harzog says, some card companies allow consumers to activate their rotating category rewards well after the quarterly deadline.
“I really like Chase Freedom, for instance, which lets you sign up during the last few weeks of the quarter and even applies the cash-back bonus retroactively to what you've already spent,” she says. “I think rotating categories are great, because they provide consumers with a lot of spending variety options throughout the year.”
4. Beware of caps and thresholds
According to Goldman, many credit cards have gotten away from capping rewards earnings. Still, certain cards may have spending limits for certain categories (see the American Express Blue Cash Preferred card's limit for groceries above). Minimum spending thresholds to snag sign-up bonuses are also common.
Some cards, however, have spending tiers, which require cardholders to spend a certain amount before unlocking a higher cash-back rate. The Discover Open Road card, for example, starts at 0.25 percent cash back and goes up to 1 percent cash back only after the cardholder spends $3,000.
“I usually tell people to stay away from cards like these,” says Goldman. “If you're a really high spender that may make sense, but for most consumers that's not a good deal, because you have to spend so much before you start seeing a benefit.”
5. Know how redemption works
Perhaps the biggest draw with cash-back cards is their simplicity. You charge purchases and get cash in return. But retrieving that cash can get complicated.
“Even I get confused about redemption options sometimes,” says Harzog. “What you should look for are cards that give you a statement credit. It's dollar for dollar and very little confusion. And if you don't know how the redemption works, call the company and don't let them off the phone until it's clear.”
Goldman says consumers should also look for special cash-back redemption offers that come with certain cards. For instance, if you have a BankAmericard cash-back card and also a Bank of America checking account, the rewards get deposited directly into your checking account — along with a 10 percent bonus.
“That's one of the best redemption options I've seen,” says Goldman. “Not only do you get that nice little bonus, but the money is right there in your checking account and you're free to do with it as you please.”
Ulzheimer also likes Chase's and Discover's cash-back redemption options, which allow consumers to purchase gift cards to various retailers at a discount. There are also deals to be had by redeeming your cash back for merchandise in the issuer's online mall, but perform price comparisons to make sure you're not better off paying cash for the item elsewhere.
Even if it offers enticing redemption deals on merchandise and gift cards, make sure your card issuer makes it easy to get straight-up cash, if that's what you choose.
“You signed up for cash back, and that's what you should get,” Ulzheimer says. “Cash back. End of story.”