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Is your cash back really free?

By Janna Herron ·
Thursday, June 27, 2013
Posted: 2 pm ET

Cash-back credit cards dangle the prospect of getting something for nothing to lure consumers. But in many cases, the consumer is forking over their own cash to get those rewards.

More than half of Capital One Cash Rewards cardholders roll an average balance of $1,223 from one month to the next, according to a study from Lightspeed Research, while spending $375 on average each month.

That means while they earn $3.75 a month in cash back, they are paying up to $21.30 in interest, a net loss of $17.55. Not only did these cardholders pay for their own cash back, but they also helped other cardholders' cash-back rewards.

(The Capital One Cash Rewards credit card's annual interest rate ranges from 12.9 percent to 20.9 percent. As of June 26, 2013, the card has been replaced with the Capital One Quicksilver credit card).

The study surveyed cash-back, points and travel rewards cardholders. The travel rewards cardholders were the most conscientious about revolving balances. Points cards generally had higher percentages of cardholders who revolved balances and those balances overall were higher on average.

Credit cards with users carrying a revolving balance

Card % of revolving accounts average card balance
American Express Blue Card 54% $4,042
American Express Blue Cash 32% $3,294
Bank of America Cash Rewards 23% $1,832
Capital One Cash Rewards 53% $1,223
Capital One Venture 45% $4,156
Chase Freedom 36% $3,310
Chase Sapphire 10% $4,454
Citi Dividend 21% $2,954
Citi ThankYou 39% $5,172

Source: Lightspeed Research.

The temptation to spend to get cash back is strong. A 2010 study by the Federal Reserve Bank of Chicago found that cash-back cardholders increased their monthly spending by $76 in the first nine months of opening an account. Their average debt rose by $197 per month. They reduced their monthly payment by $83 during the same period.

Many cash-back cards make it easy to spend by offering sign-up bonuses and zero percent annual percentage rates for an introductory period, according to Bankrate's survey of 54 cash-back cards.

So, some cardholders may spend more than they usually do to get a bonus and can't pay off their balances entirely. Or, cardholders will spend more while enjoying the no-interest period, but can't pay off the debt before the intro period ends. In both cases, that means interest charges that could negate or devalue the bonus or any cash back that was earned.

The real winners are cardholders who pay off their balances entirely every month and receive the full value of their cash back and bonus. The Lightspeed Research survey indicates that, in the majority of cases, most cash-back cardholders do this. The question is: Do you? Or, are you losing your cash back to interest charges?

Follow me on Twitter: @JannaHerron

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July 03, 2013 at 8:53 am

As many have already pointed out, this card only works when you carry no balance. We've had the AMEX Blue card for 4 years, and use it for everything. We also pay the balance every month, so it's treated like a Debit card. It works, but you have to be smart about it.

July 02, 2013 at 4:21 pm

We use our REWARDS CARDS for everything, water, milk, bread , gas, for everything that accepts the card. We use the points to fly on our vacations, useually free or almost free. to get the free benefit you have to leave no balance on the statement each month.

Plaid Fog
July 02, 2013 at 3:54 pm

Hayseed-You are wise beyond your years!

July 02, 2013 at 2:32 pm

You should never purchase anything on a credit card that you can't pay for with cash right now. Pay off the entire balance each month. "Cash rewards" programs only work if you follow those rules.

July 02, 2013 at 1:51 pm

I pay my card off every month and get about 50.00 every 6 months.
I'm ahead

July 02, 2013 at 11:30 am

Wake up Folks. Get a FCU Credit Card. Throw the others away. The CU credit card should be available to anyone with a good credit rating for about 9.1%. So, If you are paying 15 or 16 percent, guess where the "FREE" money is coming from. Aren't they nice? Using your money as bait, then giving part of it back to you. Strive to pay off your balance each month. I have to say a word about those "Innocents" who try to turn you on to in-house credit cards, usually running about 23-24%. Ask them what the interest rate is on their card. Most don't know. Then ask them if they understand the word "USURY". None of them know. At this point, I politely, but pointedly, tell them that I would have more respect for someone who shoved a gun in my face. At least that mis-guided individual would be an "honest" crook, with his intentions boldly made known in the full light of day.

Stan Talabach
June 30, 2013 at 8:50 am

Free? APR at 12% or higher while borrowing from the FED at 2%? FORGET REWARDS, lower the rates!

Just Sayn
June 29, 2013 at 9:51 am

The only way these cashback/points cards work is if you carry no balance. If you are getting 1% on your savings, and paying 9% on your credit card, you are not very savy.