For my own finances, I’ve been a fan of credit cards with cash back programs. Some financial experts advise avoiding best credit card deals completely, even those cards that offer rewards like cash back or offer on best gas credit cards and small business credit cards. I’ve never been a fan of this approach — again, for my own finances — because I see a credit cards as just another tool for personal finance. A hammer is inherently neither good nor evil; it’s a tool that someone can use to fix a roof or to send another person to the hospital.
For a large portion of consumers, credit cards cause trouble. That may not be a reason to avoid credit cards entirely, as consumers can learn how to use credit cards effectively. Those of us who do believe we use cash back credit cards offers responsibly, paying bills in full every month, never paying interest, and buying only what we can afford, are relatively comfortable with the use of this tool, but even the best of us are subject to issuers’ traps.
Cash back credit card programs include traps that help issuers recover the cost of paying out benefits to their customers. While some traps can be avoided by managing finances closely, other traps take advantage of the psychological aspects of using plastic rather than cash. These traps can be more difficult to avoid, because consumers cannot control their subconscious tendencies. Here are the cash back traps to avoid, if you can.
1. Credit card users spend more
The process of taking cash out of your wallet and handing that money to another person is a very deliberate activity, both physically and mentally. Parting with cash has psychological ramifications. In most people, particularly those who best understand the value of having money saved, the act of giving the cash away triggers the same reaction as a painful activity. Spending money and pain are linked in the brain.
When you use credit cards, you add a buffer between your cash and the process of parting with it. Spenders are less likely to hesitate and less likely to get that twinge of pain associated with handing over bills and coins. People familiar with computer science would call this a layer of abstraction. You’re controlling your money by using a representation of that money, not the cash itself, and that makes the process feel better. In addition, cards with a rewards program like cash back encourage higher spending, because that cash back is seen as a reward that can be maximized by spending more.
Avoid this by making a concerted effort to buy only what you could afford with cash at any time.
2. Late fees and interest negate any cash back benefits
If you have debt that you carry over from one month to the next, forget about cash back rewards programs. The interest you pay eliminates any benefit you may receive from the issuer. Even if you manage to earn more cash back than interest you pay, consider that cash back credit cards often have higher interest rates than cards without any benefit program. While issuers advertise their cash back cards heavily, these cards should be used only by individuals who pay the bill in full every month. Late fees also negate cash back, so never pay the bill late.
Accidents and emergencies happen. It only takes one to erase a year’s worth of cash back. If you use a cash back credit card, make sure you tell your issuer to withdraw your payment in full every month, and make sure you have enough money in your bank account to cover your credit card bill at the right time. Have an emergency fund to cover yourself if you lose your job and can’t pay your credit card bill from your income.
3. Rotating categories and opt-in requirements
Over the past year, credit card issuers have increased their cash back percentages in an effort to win back customers who miss the 5 percent cash back on all purchases during reward programs’ heyday. This time, the higher benefits come with a catch. With tiered cash back, where some spending earns 1 percent, some earns 3 percent, and some earns 5 percent, issuers have become trickier. In many cases, the highest level of cash back is available only certain categories of spending, like gasoline or groceries, and the categories for which the companies make the cash back available rotate every three months. You have to pay attention if you want to keep track of how much cash back you should be earning.
Furthermore, some issuers require you to opt in to the highest cash back tier when the categories change every quarter. If you forget to contact the issuer, you don’t earn the higher percentage.
4. Incorrectly categorized purchases
This has happened to me as well as many Consumerism Commentary readers who have shared similar experiences. If you shop around to various gas stations to save money, and your card offers a higher cash back on gasoline purchases, you may not get your full cash back. While stations with brands like Exxon/Mobile, Sunoco, and Shell are almost always categorized correctly, some of the smaller stations are not. Issuers maintain a list of vendors and their categories for earning cash back, but smaller retailers often don’t make the list.
If you’re in a period where gasoline purchases earn 5 percent and all other purchases earn 1 percent, if you shop at a less-expensive, off-brand gasoline station to save money, you may not receive the 5 percent cash back you should. Issuers are inflexible, and customer service representatives will often say that if a retailer is not categorized correctly, there’s nothing they can do to credit you the full cash back.
5. Cash back can be difficult to claim
One of the first cash back cards I used on a regular basis earned 5 percent cash back on all purchases. Those were great days. But retrieving the cash I earned wasn’t a perfect process. After earning $50, I was able to request that the company send a check to the address on my account to cover my cash back. If I were to close my account before reaching the $50 cash back threshold, I would forfeit my cash back.
6. Cash back isn’t always cash back
File this under misleading advertising. If a credit card issuer is offering cash back, I expect to receive cash back at the rate that is advertised, like 2 percent. That should mean that for every $100 I spend, I earn $2 cash back. I don’t expect that the cash back be in the form of a gift card for a retailer. Many issuers have improved their labeling of these programs, but some problems still exist.
Some issuers still use the term “cash back” when referring to a statement credit. If a credit card company credits your statement once a year with the cash back you earn for the previous twelve months, you haven’t earned cash back that you can use to deposit into savings, invest for the future, or buy yourself something additional. The issuer is keeping the cash back in its own hands by applying your cash back to your account. Assuming your statement credit is $300, you can take $300 of your own cash that you would have applied towards your credit card bill and use that to increase your savings or buy something else, but the idea that you’re not receiving any real cash back from a cash back program is bothersome.
Additionally, if you close your account before your annual cash back credit, you might be forfeiting the portion of the benefit you earned.
7. Earning maximums and thresholds
With your favorite cash back card, or one that looks great on the surface, you may find that the fine print limits your cash back earning potential. Some of the highest cash back rates, particularly those 5 percent rotating categories, are limited. The highest rates may only apply to the first $1,000 in spending — or less. The “biggest cash back credit card” that you may hear about in a competitor’s commercials is the Discover More Card. You can earn 5% cash back in rotating categories each quarter, but the 5% is limited to the first $300 spent in that category. That means that the most you can earn from the accelerated tier is $15 each quarter. Your spending in these categories may not exceed $300 over the course of three months, but if it does, you’ll be leaving money on the table.
8. Changing terms
Thanks to the Credit CARD Act of 2009, issuers have less flexibility to change your credit card terms without much notice. Issuers do have options if they want to move customers from a great cash back program to a less impressive program. The most used option is replacing one card type with another.
The benefits spenders receive today can change at any time. Credit card issuers react quickly to market forces; when one issuer offers a higher benefit, other issuers often respond within a week to remain competitive. The same reaction can happen on the opposite direction.
9. Some retailers are excluded
If your card earns 5 percent cash back at groceries stores, but you shop for groceries at Costco, Target, Walmart, or some other store that’s not a pure grocery store or supermarket, you won’t earn that higher tier of cash back. In fact, some of the big warehouse stores are excluded from cash back programs altogether. Some of these stores, often offering products at a discount compared to other stores, as well as small retailers who can’t afford to pay the higher interchange fees associated with some rewards cards, ban the use of cash back credit cards in their stores.
Shoppers may not be aware of this no cash back requirement until they have finished shopping. At the cashier, they are given the opportunity to buy all the products they collected from around the store with a card that offers no cash back, to pay for their items with cash, or leave the store without making their purchase. Most shoppers will simply forgo the cash back and buy the products anyway, as that’s often a better option than considering the time spend in the store a waste and creating a necessity for shopping somewhere else.
10. Misleading conversion rates
As mentioned above, customers expect cash back programs to be straightforward. A 2 percent cash back rate should mean that every $100 earns $2 in pure cash. Some issuers make the conversion more complicated that it should be, by saying you can redeem your cash back for full value only through retail gift cards, and more flexible forms of rewards would cost more. For example, a $100 pre-paid debit card might cost $125 in cash back rewards.
This conversion obfuscation is aided by issuers who use a point system rather than a straight cash back system. Always be wary of point-based benefits if your goal is to earn cash back. When credit cards use points, they add a layer of abstraction between your reward earnings and your cash back, and issuers can do whatever they like with those points. Once you earn points, credit card companies can change their value relative to cash or change the price of the rewards for redemption.
Although some of the best maximizers can find ways to earn the most cash back from their spending, and some of the most focused work own a combination of credit cards to earn the highest cash back on all categories of spending at any one time, credit card issuers still have the upper hand. One mistake with a payment and you can throw away all the cash back you’ve earned in a year. You may misunderstand the complicated terms or forget to opt in to this quarter’s highest tier. Or, just like a large portion of credit card users, you may spend more than you would otherwise in search of a relatively small reward. Cash back credit cards are tools best used by those who have been trained to recognize these traps and fight the psychological impulses that allow spending to increase when using one of these tools.
Updated December 21, 2015 and originally published November 23, 2011.