I asked on Facebook for some money questions to answer in this column. One person asked, “How do cash-back credit cards really work?” Personally, I’ve never had a lot to do with rewards cards, but here’s what I found out.
Of those who have rewards credit cards, 57.4 percent have cash-back cards, making them the most popular type of rewards program. The most important fact to realize before you get sucked into the world of rewards card is that each card comes with a cap. That means that no matter how good you get at using the cards and no matter how much money you charge on them, there is no way you can possibly earn more than $300 to $600 per year, per card. And that’s by charging thousands of dollars a year in purchases to the cards.
Smart financial planning means doing your own cost-benefit analysis to determine if this extra potential money is worth the time you’ll spend managing the cards and redeeming the rewards. If you are a retired senior citizen living on a fixed income, it may very well be. If you are a busy working mom whose every minute is accounted for, it may not be worth it at all.
It’s important to remember that bottom line, because cash-back credit cards, like Starbucks cards, Hyatt Gold memberships, frequent-flyer programs, coupons and gift cards, are all part of the estimated $50 billion “loyalty industry.”
Loyalty is a kind of marketing designed like a game, with lots of rules to follow and points to win. The marketers use principles like “artificial advancement” (creating lots of little steps, or giving a head start, to make you feel like you’re making progress) and “combined currency” (buying things with a combination of points and cash seems cheaper than in either currency alone).
Cash-back credit cards have a lot of fine print, and rules that keep changing — all by design. The more time you spend trying to win their game, the more the credit card companies actually win in the end.
If you’re still interested in applying for a cash-back rewards card, here are some points (no pun intended) to keep in mind.
• Don’t pay extra for a cash-back card. In today’s credit market, you should be able to find a card with no annual fee and no expiration date on rewards.
• Consider Chase Freedom. The Chase Freedom card was the one most commonly mentioned in my research. It also ranked the highest in a national survey of rewards cardholders in December for ease of redeeming benefits and for satisfaction with those benefits.
Other names that made it to the top of various rankings are the American Express Blue Cash Everyday, Capital One Cash Rewards and Discover It Card.
• Don’t send out too many applications. This is good advice any time: Putting in lots of applications can hurt your credit score. So can signing up for too many cards at once and then canceling them once you redeem the rewards.
• Consider your monthly spending habits. Most cards have a minimum amount to earn a reward, like $500 a month. They also tend to offer higher cash-back percentages in certain popular categories. In the case of the Freedom card, they offer 1.5 percent cash back across the board, then 5 percent in categories that change every three months, such as Amazon purchases, groceries or gas. Other cards such as the Costco TrueEarnings American Express Card offer higher cash-back rates on fixed categories such as gas and travel.
• And speaking of gas ... In a 2009 survey, people who had credit cards with gas rewards were the most satisfied of any rewards-card holders and used their cards the most often. This may have to do with the fact that we buy gas in pretty much the same places, week after week.
Contact Anya Kamenetz by email at diyubook@gmail.com.