Are Cash Back Credit Cards Worth Considering?
Get 5% cash back on your purchases! We are all only too familiar with promotional statements such as this one. And experience has taught most of us to be equally familiar with the two words that follow 'Conditions Apply'!
Cash back credit cards are typically those that offer the cardholder a monetary amount as 'cash-back' on purchases made using the card. This amount is usually made available to the customer by crediting the amount to his card account such that the outstanding amount on the card is reduced by such amount. In some cases the amount may actually be paid to the cardholder through other forms of payments such as a cheque. So far, so good.
One should, however, keep the following in mind when opting for or evaluating a cash back credit card:
* Interest rates on outstanding balances: Cash back credit cards usually have a higher interest rate charge on any outstanding balances on the card. If you usually carry outstanding balances on your credit cards, then you should simply go for the lowest interest rate cards rather than trying to go for a higher interest rate cash-back card. No amount of rewards or cash back will ever be able to compensate for the interest rates you pay on your outstanding balances.
* Limitation on transaction outlets: Most cards have a limitation on their cash back offer being available only on purchases made at specific outlets or establishments. The cash back offer will be available as long as you make purchases from these listed establishments. If this list does not include places you usually frequent, the card may end up not giving you any cash back benefits.
* Limitation of product categories: Similarly, there may be limitations on product categories on which the offer is available. For example, the card may be offering the facility of cash back only on transactions made at food outlets. Once again, if the product categories listed are not those that you spend money on frequently the card may not be the right one for you.
* Maximum amount on cash back: All cards invariably have a limit on the cash back they would offer. 'Get 5% cash back on your purchases' may not necessarily mean getting 5% on all your purchases. Typically, these offers are capped at an upper limit. For example, a card may be offering 5% cash back subject to a maximum amount of Rs. 500 in month. This would mean that if you shop for Rs. 50,000 you would only get back Rs. 500 and not Rs. 2,500.
* Compare the maximum cash back with your annual fee and other charges: Needless to say, cash back cards make most sense if they come with no joining or annual fees. In cases where they do, it would be useful to compare such fees against the maximum cash back on offer. Usage of a card with a hefty annual fees and then using the cash back to pay for the annual fees does not really make sense unless the cash back program actually provides you with a monetary benefit higher than your fees. If all you are using your cash back for is to pay for the card itself, you might as well go for a no cost - no cash back card.
* Other terms and conditions: There may be other conditions that need to be fulfilled before you can avail the cash back offer such as a minimum spend in a month to make you eligible for a cash back; restrictions on how the cash back may actually be used i.e. there might be restrictions that only allow you to accumulate your cash back and redeem such amounts at specific outlets; specific time period during which the offer is available etc.
In the end, one must realise that the sole purpose of these offers is to make customers spend more. What is offered as cash back is typically coming out of the commissions that card issuers receive from merchants and establishments. One needs to ensure that his expenditure amount and frequency is not swayed by the sole purpose of availing the offer. Other than this, cash back cards will make sense only if you don't usually carry an outstanding balance on your card and if the card associated fees and charges are not higher than the maximum amount you can get as cash back.
Cash back credit cards are typically those that offer the cardholder a monetary amount as 'cash-back' on purchases made using the card. This amount is usually made available to the customer by crediting the amount to his card account such that the outstanding amount on the card is reduced by such amount. In some cases the amount may actually be paid to the cardholder through other forms of payments such as a cheque. So far, so good.
One should, however, keep the following in mind when opting for or evaluating a cash back credit card:
* Interest rates on outstanding balances: Cash back credit cards usually have a higher interest rate charge on any outstanding balances on the card. If you usually carry outstanding balances on your credit cards, then you should simply go for the lowest interest rate cards rather than trying to go for a higher interest rate cash-back card. No amount of rewards or cash back will ever be able to compensate for the interest rates you pay on your outstanding balances.
* Limitation on transaction outlets: Most cards have a limitation on their cash back offer being available only on purchases made at specific outlets or establishments. The cash back offer will be available as long as you make purchases from these listed establishments. If this list does not include places you usually frequent, the card may end up not giving you any cash back benefits.
* Limitation of product categories: Similarly, there may be limitations on product categories on which the offer is available. For example, the card may be offering the facility of cash back only on transactions made at food outlets. Once again, if the product categories listed are not those that you spend money on frequently the card may not be the right one for you.
* Maximum amount on cash back: All cards invariably have a limit on the cash back they would offer. 'Get 5% cash back on your purchases' may not necessarily mean getting 5% on all your purchases. Typically, these offers are capped at an upper limit. For example, a card may be offering 5% cash back subject to a maximum amount of Rs. 500 in month. This would mean that if you shop for Rs. 50,000 you would only get back Rs. 500 and not Rs. 2,500.
* Compare the maximum cash back with your annual fee and other charges: Needless to say, cash back cards make most sense if they come with no joining or annual fees. In cases where they do, it would be useful to compare such fees against the maximum cash back on offer. Usage of a card with a hefty annual fees and then using the cash back to pay for the annual fees does not really make sense unless the cash back program actually provides you with a monetary benefit higher than your fees. If all you are using your cash back for is to pay for the card itself, you might as well go for a no cost - no cash back card.
* Other terms and conditions: There may be other conditions that need to be fulfilled before you can avail the cash back offer such as a minimum spend in a month to make you eligible for a cash back; restrictions on how the cash back may actually be used i.e. there might be restrictions that only allow you to accumulate your cash back and redeem such amounts at specific outlets; specific time period during which the offer is available etc.
In the end, one must realise that the sole purpose of these offers is to make customers spend more. What is offered as cash back is typically coming out of the commissions that card issuers receive from merchants and establishments. One needs to ensure that his expenditure amount and frequency is not swayed by the sole purpose of availing the offer. Other than this, cash back cards will make sense only if you don't usually carry an outstanding balance on your card and if the card associated fees and charges are not higher than the maximum amount you can get as cash back.