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Is Your Cash-Back Credit Card Glitter or Gold?

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By Eva Norlyk Smith Ph.D.
June 4, 2012

QDear Eva,

Whenever I go to my bank, they try to convince me to get a cash-back rewards credit card. I’m wary because I know they are going to use it to make money off me somehow. The bank (Bank of America) tells me I can get 3 percent cash back, but it seems too good to be true. Can you help me think of some questions I should ask about this card?  They gave me a giant packet of information about it, but I’d like to know what to look for, because I’m sure there’s probably a catch that I’ll end up missing. –Nicole

AHi Nicole,

You’re right to be wary. Banks are not in the business of giving money away. So, despite the generous cash-back offerings, in the long run, most banks end up earning more money on rewards credit cards than consumers save.Ask Eva

That being said, if you take the time to educate yourself and learn how to stay one step ahead, you can be the one laughing all the way to the, well, bank. Most consumers don’t pause to ask the questions they need to do this, so that’s how banks win out. Here are six questions to ask before applying to make sure you don’t fall into that trap.

1. Is this the best offer for me? Don’t just go with the first offer that comes your way. There are a lot of credit card offers out there, and the one offered by your bank is not necessarily the best one nor the best fit for you.

Take a little time to compare cash-back credit cards, so you can see which ones best fit your spending patterns. For example, some cash-back credit cards offer higher cash-back rates on gas purchases; those can be advantageous for people with long commutes. Others offer premium cash-back rates — as high as 6 percent — on grocery purchases; these can be particularly useful for people with large families.

2. Is it glitter or gold? Have you ever sunk your teeth into a really delicious-looking cake, only to find it tastes like cardboard sweetened with aspartame? Well, sometimes credit card offers can be like that. Credit card marketers are experts in serving up tempting offers that turn out to have little substance.

As cash-back credit cards go, for example, the BankAmericard credit card offer you’re looking at is not bad at all. But check the fine print, and you will see that the 3 percent cash back applies only to gas purchases. The card offers 2 percent cash back on groceries (not bad), and 1 percent on everything else.

The card also offers a 10 percent customer bonus, if you redeem the cash-back rewards into a BofA checking or savings account. While this may sound like gold, it’s really just glitter: You get 10 percent on the cash back earnings, so that 10 percent is only 0.3 percent extra on gas purchases, 0.2 percent extra on groceries, and 0.1 percent extra on everything else. This is a perfect example of a weasel term, but it’s not the worst out there by a long shot. So read the fine print of the rewards terms, and do the math to make sure you know what you’re getting.

3. What are the real terms? Card issuers prefer that you pay attention to the glittery rewards, and forget about the other card terms. Don’t be intimidated by the large package of application materials. Thanks to the Credit CARD Act, card issuers have to make terms and conditions very transparent. Look for the summary sheet that details that rates and fees in a simple format. That sheet provides a table with all the essential terms, including interest rates, annual fees, penalty rates and cash-back terms clearly outlined by category.

4. Will I spend more? The real catch with cash-back credit cards (or rewards credit cards in general) is that they can make you spend more than you otherwise would. We all get a warm and fuzzy feeling when saving money, so if you’re getting a sweet cash-back deal each time you pull out that credit card, chances are you will pull it out more!

Indeed, one study from the Federal Reserve Bank of Chicago found that people enrolling in a cash-back rewards program on average increased their spending more than $70 a month. Do a reality check to make sure you won’t fall into this trap.

5. How much can I charge each month? One of the most common mistakes people make with rewards credit cards is that they charge more to the card than they can pay off at the end of the month. When that happens, the table turns, and, instead of the card issuer paying you, you end up paying high interest on those credit card charges.

Before applying, figure out how much you can charge to the card and still pay off the balance in full each month. Then do the math to see how much in cash back you will really be earning to see if it’s worth the effort.

6. Is this the right time to get a credit card? Look at the complete picture. The bank may think it’s a great idea for you to get a credit card, but that doesn’t necessarily mean it’s the right time or fit for you.

Consider how the decision to get a credit card will fit into your overall financial picture. This includes thinking through the effect on your credit score. Getting a credit card can often improve your credit score (if you pay bills on time), but it depends on your overall financial situation.

Also consider if you will have the time and energy to plan your spending in a way that takes full advantage of the cash-back rewards. If the answer is no, then it’s probably best to turn your back on the offer, no matter how tempting it may seem.

Got a question for Eva? Send her an email.