This article is brought to you by Michael from CreditCardForum.com, a site that focuses on credit card discussions and reviews. Michael specializes in reviewing and ranking the best cash back credit cards, and today he’s going to explain the ins and outs of credit card rewards programs.
Back in the 1970s and 1980s, it was rare to see credit cards offering rewards. Nowadays, almost every card comes with some sort of reward program. In my estimation, about 70% of U.S. credit cards offer rewards of 1% or more, like 1 point per dollar or 1% cash back. Some cards even offer up to 5% cash back on specific categories. But is this “free money” really as good as it sounds?
The truth is, reward programs often come with a lot of fine print. Here are some important things to keep in mind when choosing a credit card with rewards:
Spending Levels: Take the American Express Blue card, for instance. It advertises 5% cash back on gas, groceries, and drug stores, and 1.5% on everything else. But the catch is, this only kicks in after you’ve spent $6,500 in a year. Until you hit that mark, you just get 1% back on those main categories and only 0.5% on everything else. So, watch out for these spending thresholds.
Limits on Rewards: Banks lose money when they offer 3% to 5% cash back in certain categories. They compensate by charging interest to those who don’t pay off their balance each month. However, not everyone carries a balance, so these programs aren’t always profitable for banks. As a result, many cash back cards limit the rewards you can earn. For example, with the Chase Freedom card, the 5% cash back is only valid on the first $1,500 spent in those categories each quarter. After reaching that limit, I switch to another card to keep earning high cash back.
Increased Interest Rates: High cash back cards aren’t big moneymakers for banks, so they often have higher interest rates. Carrying a balance on such cards doesn’t make sense. Even with a tempting 5% cash back, a 15% to 20% interest rate can quickly wipe out your gains if you don’t pay off your balance in full each month.
Annual Fees: The best cash back cards often come with annual fees, meaning you’re paying money to earn money. It might be worth it if you’re a big spender, but if you’re not planning on making significant purchases, make sure to compare the potential annual rewards with the annual fee.
Expiring Rewards: Don’t forget to redeem your points or cash back before they expire. From my experience reviewing hundreds of credit cards, most rewards expire 36 months after earning them, but some cards have shorter expiration periods, as little as 12 months.
In conclusion, while cash back credit cards can help you save on your purchases, you need to be aware of the finer details to truly benefit.