| Curtis Arnold is the founder of
CardRatings.com.
CardRatings.com
offers a consumer report of US credit cards and instant online approvals. Named
among the 'Web's Best Sites' by SmartComputing magazine! The site is courtesy of
Citizens for Fair Credit Card Terms, Inc. |
An excerpt from
How YOU Can Profit from Credit
Cards: Using Credit to Improve Your Financial Life and Bottom Line.
A little extra cash in your pocket sounds
wonderful, doesn't it? Maybe you could use it for a nice dinner out on your
birthday, a movie night out with that special someone, a rainy-day shopping
spree, college savings for you or your child, or even a way to help pay down
your debt. For all these reasons, and thousands of others, you can imagine, a
cash-back credit card might be the perfect fit for your wallet.
Cash-back credit cards are fairly
straightforward, and, in my opinion, they're the simplest type of reward card to
use. You usually get a credit to your account, ranging from 1% to 5% of your
spending. Some cash-back cards, like the one in my wallet, give automatic
credits on a regular basis. A few cards send you an actual check in the mail.
Cash-Back Credit Cards Are Great If...
...you don't carry a balance from month to month.
Credit cards that offer cash rebates tend to have a higher interest rate, which
usually wipes out any reward you might receive if you carry a balance. If you
don't pay off your bill every month, use a credit card with the lowest interest
rate you can get.
Dr. Mary Ann Campbell (CFP), president of Money
Magic, Inc., and a money educator, sums it up best: "Cash-back is a good option
if you are truly managing your credit cards so you are literally earning that
cash, and not turning around and paying it back in any other form."
Use your rebate card wisely, and pay off the
balance in full every month. Then the cash you receive is a reward, pure and
simple, for all the hard work you've done in managing your card responsibly.
You Don't Carry a Monthly Balance But...
...not all cards are created equal, either. As
with any other type of card, you should definitely shop around. Ideally, pull
out your calculator to determine the best reward card, given your spending
habits and lifestyle. Consider it a wise investment of your time, with the
payoff being more money. You'll also get peace of mind from knowing that you've
done some profitable decision making. (The "Consumer Reviews" section of
CardRatings.com is a good place to start because the site enables you to
conveniently search for cards by reward types.)
Here are some other things to keep in mind when
reviewing offers:
Is There an Annual Fee?
Paying an annual fee is a pet peeve of mine,
particularly when it comes to cash-back cards. But because only a few cards out
of the hundreds and hundreds available charge an annual fee, you shouldn't have
to settle for one that does. If a card with an annual fee seems too hard to
resist, it's time to crunch some numbers and compare the benefits to those
offered by other cards that don't have an annual fee.
When comparing benefits, be realistic about which
ones you'll actually use. If a card with a $200 annual fee offers a generous
perk, such as free international companion airline ticket every year, but you'd
never use it, then that perk isn't worth a dime to you! Rarely does the math add
up. The one notable exception, which we discuss in Chapter 8, "Use Targeted
Cards to Your Financial Advantage," is a relatively new breed of cards that
targets affluent card members.
Does the Card Require You to Carry a Balance?
A few cards offer you a greater rebate percentage
or some other freebie if you carry a balance. A typical example here is a card
that offers 1% rebate on all purchases but increases that rebate to 2% in any
month when you carry a balance.
This scenario should be a big red flag. Any
interest that you pay to get a more generous rebate will invariably cost you
much more than the amount of cash you get back. Paying 15% interest on your
balance for the privilege of earning an extra 1% rebate is a good way to end up
in a pauper's prison.
If you're considering such an offer, start with
your annual spending level (how much you'll charge during the year). Figure out
how much you'll pay in interest charges and fees, and note how much cash you'll
get back. I'd be shocked if you actually ended up receiving more cash than you'd
pay in interest and fees. (Please let me know if you do!) Be sure to compare
your findings to other offers to determine which one gives you the most back.
For more tips on finding the best cash back
credit card, and other valuable credit card tips, check out Curtis' new book,
How YOU Can Profit from Credit Cards: Using Credit to Improve Your Financial
Life and Bottom Line.
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