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|
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?
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