If you earn cash back for traveling, you’d better not be a homebody. Or, if you use your credit card in all types of stores, don’t sign up for a credit card that gives extra earnings for specific purchases only.
In both cases, you’re not getting the most from your spending. There might be a card that better fits your lifestyle.
“Understand how you spend, and then select a rewards card,” says Bill McCracken, CEO of Synergistics Research, a financial services market research firm in Atlanta.
Some cards offer the same rewards potential for every purchase, while others offer accelerated earnings for certain categories.
For instance, Chase Sapphire Preferred Card offers two points per dollar spent on travel and dining at restaurants around the world, but just one point for other purchases. Meanwhile its sister card Chase Freedom Unlimited offers 1.5 percent cash back for all purchases.
Consumers tend to favor cash over other rewards. In a 2017 Bankrate survey, 49 percent of consumers said they redeemed their rewards for cash, followed by 17 percent for airline tickets and 12 percent for gift cards.
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Keeping a balance
A rolling balance is a cash-back card’s worst enemy. At some point, you’ll end up financing your own rewards program through interest charges. Here’s how.
Say you charged $500 on your cash-back credit card that earns 1 percent back on everything and carries a 16 percent annual percentage rate. But you paid off only $100 of that balance. Congratulations, you just paid $5.33 in interest for $5 in cash back. The hole gets deeper if you roll over the balance again and again.
“That is the fastest way to chew away the rewards you’re earning,” says John Ulzheimer, a nationally recognized expert on credit scoring, credit reporting and identity theft.
And if you have to hold off charging this month to pay off last month’s charges, then you’re not earning any more rewards. The only way to get every cent you earn through rewards is to pay off your balance entirely every month.
Earning cash back can get addictive, but the urge to spend can be dangerous. Some cardholders may end up buying more to maximize a promotion or to get a special reward. But think before spending. If you’re buying just for the sake of earning cash back, you’ll be richer if you don’t buy at all.
For example, if you need to charge $100 worth of junk to get a $25 cash-back bonus, why not just hold off and pocket the $100? Consider it paying yourself with your own cash-back rewards.
And beware of attractive sign-up bonuses that come with spending thresholds.
“If you are able to shift your buying from one period to another to take advantage of bonuses, great,” says McCracken. “But don’t buy something if you don’t need it just to earn a bonus.”
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Forgetting to register
Some cash-back cards offer higher earnings potential in certain categories, but it all depends on timing and your participation.
Some issuers may offer 3 to 5 percent cash back on rotating categories in addition to 1 percent cash back on all other purchases. For example, Discover it and Discover More are giving 5 percent back on restaurant purchases after enrollment (up to $1,500) through the end of September. From October through December, the card’s special 5 percent cash-back bonus is for purchases at Amazon and Wholesale Clubs.
But it doesn’t happen automatically. Cardholders must sign up online to capitalize on the greater cash-back rewards.
“Not signing up for rotating rewards is simply leaving money on the table,” McCracken says. “There is no cost to sign up, so do it.”
The same goes for any special promotions that cash-back credit cards may run during the holidays or for back-to-school time. Check every letter, email or text from your credit card company to find out how to register.
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Being a bad credit card user
Credit card companies want cardholders who pay on time and use their cash-back cards often. If you don’t, they’ll take your rewards.
Becoming delinquent on your credit card account is one good way to forfeit cash-back rewards that you have earned, says Linda Sherry, director of national priorities at Consumer Action, a consumer advocacy group. The best way to know your card’s policy is to check the fine print that explains how the rewards program works and the consequences of late payments, she says.
If you plan to transition to another rewards card because it suits you better, make sure to redeem all the cash back on your old one before you close the account. Otherwise, you’ll sacrifice the rewards, Ulzheimer says.
However, if you plan to keep the old one open for occasional purchases, use it once every quarter to keep it active. Credit card companies will eventually close an inactive account, says Ulzheimer, and your rewards will be lost.
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Letting points expire
If you like to hoard your cash-back rewards for a big redemption in the future, you may want to reconsider your strategy. Those rewards may expire, depending on the terms outlined in your card’s fine print, and the point of having a cash-back card becomes moot.
To avoid losing free cash, Ulzheimer recommends making cash-back rewards redemption an annual event. For example, cash in right before the holidays to help with the shopping load. Or, give yourself a birthday present each year with your cash-back rewards.
“You don’t want to let your cash-back balance get so obnoxiously high that if you do forget and your rewards expire,” he says, “then you’ll really kick yourself.”