Everyone is talking about cash back credit cards these days. Everyone wants to earn free money for spending money they would have spent otherwise; it’s free! Who doesn’t love free money? The truth of the matter, though, is that cash back credit cards are not usually very useful for the general population. There are some people who have a misconception about what they offer, and that means some people are more than little annoyed when it comes time to earn their cash back. After standing in line at the supermarket just last night overhearing the most absurd comment in the history of absurd comments, it came to my attention that people have a preconceived notion that cash back cards might be something that they are not.
As my older daughters and I stopped to pick up our favored Publix subs to bring home for dinner for us and daddy after gymnastics, we stood in line to checkout. When the elderly woman in front of us slid her card, she stood there with her hand out. I assumed she used her debit card and chose to receive cash back. Confusion ensued between this woman and the cashier, and it eventually came out that she was using her new cash back credit card to purchase her groceries. She wanted her cash back.
Oh my. Part of me wanted to laugh. Another part of me felt badly for the woman who was waiting for her cash back and absolutely confused as to how it worked. Fortunately, a manager came over and took her to the side to help her. I don’t know how the situation ended, but I do know that she did not read the fine print – or the big print. That leads me to want to clear up a few misconceptions that cash back credit cards are a personal ATM for those who have them.
They’re Not Always Profitable
Sure, cash back credit card lenders want you to think that your card is going to earn you money upon money upon money throughout the year. However, it’s not always so. Let’s discuss the fact that you have to use the card to earn cash back. Most cards want you to spend in certain areas and you’ll earn cash back in those areas at a great rate, but not at a great rate elsewhere. Some cards come with an annual fee, and there is always interest. The only way a cash back credit card is profitable is if you meet the following requirements:
- You spend enough to earn cash back to cover the annual fee
- You pay the card off in full every single month and never pay interest
- You spend in the categories that pay
If you don’t meet these stipulations, you won’t see a cash back credit card as being very profitable. You’re better off using a card that earns you hotel stays or airline miles.
How Much Do I Need to Spend?
Let’s use the Blue Cash Preferred Card from American Express as an example. The card comes with a nice $150 signing bonus, a $75 annual fee and 1% cash back on most everything. You’ll earn 6% cash back on all supermarket purchases up to $6,000, and 3% on all gas station purchases and select department store purchases up to the same amount.
With the annual fee, your $150 cash back bonus is only worth $75. Additionally, you do have to spend $1,000 within the first three months of activating the card to earn that. If you spend $15,000 per year on the card maxing out the high-paying categories, you’ll earn $360 cash back on supermarket purchases. You’ll earn $180 on your gas and department store purchases. You’ll then earn $30 on your other purchases.
That’s a nice earnings system. However, this is only if you max that out. If you don’t, you’re going to earn far less. If you spend $15,000 per year but only spend $3,000 at the supermarket and $1,000 on gas and department stores since American Express is not accepted everywhere, you’re only earning $180 on groceries, $30 on gas and $110 on your other purchases. It’s still nice, but you have to spend a lot of money to earn significant money back.
You Have to Pay it Off
If you do not pay off your card in full each month, you run into two problems. The first is that your interest rate will eat every bit of your cash back. You don’t profit when you pay interest. The other problem is that you have less balance to spend money and earn cash back. If your card is maxed out to the point you can only afford to spend $500 per month on it, you’re earning next to nothing – and less than nothing paying off the balance.
Do You Spend in The Categories that Pay?
The Amex we used as an example earlier is one of the better cards to have since most people shop at supermarkets – though these do not typically include your Super Targets and your Walmarts. That means you’ll pay more for groceries as a whole if you usually shop at those places and cannot earn cash back there.
Other cards offer higher rates in revolving categories such as movie theaters and entertainment such as sports tickets. Do you really spend enough in those categories to earn cash back that matters? Probably not.
The point is to find a cash back card that will pay you well, and then spend money on it. If you cannot spend enough to make it worth it, get another card.
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