Cash Back Credit Cards – Advantages and Disadvantages
If you are addicted to spending with your credit card, a cash back card may be a good option for you. While a cash back card helps you earn as you spend, it is important to understand how it works before you sign up for one. Here are some advantages and disadvantages of this type of card – read on to learn how to use it wisely.
How Does it Work?
When you use your credit card to buy something, the merchant pays a commission to your bank or service provider. On a cash back card, your card issuer shares some of this commission with you when you make certain kinds of purchases.
The total cash you can receive in this way is either mailed to you as a check or added to your total credit at year end. You can get back as much as up to 2% of your total credit card spending in this way. Currently, credit card issuers are competing with each other to get more customers and you may even find some 5% cash back cards in the market.
The most obvious advantage is that you actually get a discount of sorts on all the purchases you make with this card. If your credit limit is high enough to warrant large expenses such as a big screen TV or even a vehicle, then this discount adds up to quite a big saving.
You get the convenience of carrying plastic instead of wads of cash when you want to shop. In addition, you can even shop without planning ahead, for example when you catch sight of an especially attractive discount that lasts only for a limited period.
Cash back cards typically come with higher APR rates. This means that if you have outstanding balances on this card you will end up paying significantly more than if you had the same balance on a regular card.
Your credit card issuer may periodically change the categories of expenditure that you get cash back on. You will have to keep track of their policies to get any savings.
The total rebate you get may be subject to a ceiling amount. Even if you spend all year through on approved cash back categories there is a certain maximum cash back that you are limited to.
Before you sign up for one of these cards understand how you should use them to get the maximum benefit without incurring additional costs. When used judiciously these cards can be a good cash substitute when you go shopping.