Cash Back Credit Cards – The Benefits You May Be Overlooking

While cashback credit cards may seem like a great deal, it’s important to understand how they work and how to maximize them. This will help you avoid the common pitfalls of using rewards cards, such as overspending or raising interest charges.

Card issuers typically let you redeem your cash back in various ways, including statement credits, direct deposit into a checking or savings account, paper checks, and gift cards.

Tax-Free Savings

If you redeem the rewards you earn, they can be deposited into an eligible bank account, used as statement credit on your credit card bill, or converted to cash. Some cards offer additional redemption options, such as gift cards, merchandise, or travel.

Unlike points or miles earned through other card programs, cashback is considered a discount rather than income and, therefore, isn’t subject to taxes. That makes it a great way to save money, especially when trying to meet financial goals.

When using a cashback card, it’s important to make sure you pay your bill in full every month. Revolving balances can add up, making it harder to hit your savings goals. Additionally, it’s a good idea to rotate between card types depending on your upcoming spending needs. For example, if your next big purchase will be electronics, consider using a card with a higher rate in that category. It’s also important to understand cardholder benefits, such as free credit score access and extended warranty coverage.

Free Money

Cashback rewards are a great way to put free money into your wallet. While they were originally credit card features, many debit cards offer them now. They typically take the form of dollars or points that can be redeemed for gift cards or merchandise at participating merchants, restaurants, and department stores. They can also be used for travel or to pay a credit card balance.

When selecting a cashback credit card, consider your spending habits and budget. Some cards companies like Wisely offer specific categories of purchases that earn higher reward rates, such as groceries or gas. Others are flat-rate cards that offer a set percentage of rewards on all purchases. And some cards offer tiered bonus rewards in certain categories, such as electronics or dining, for a limited time.

Once you decide on the best cashback rewards credit card for your needs, use it wisely to maximize the value of the benefits. But be careful to spend your money wisely in order to earn more rewards, as this can quickly erode the value of your rewards.

Investing

Many credit card companies allow you to redeem your cashback rewards as a direct deposit into a bank or brokerage account. This allows you to invest it and reap a passive return in the long term. 

While investing your credit card rewards is a great way to invest your money passively, it should only be part of a comprehensive financial plan. The money expert Clark Howard warns against spending more than you can afford to collect credit card rewards. Suppose you’re using a rewards credit card to reach your retirement, education or other savings goals. In that case, it’s best to focus on earning the maximum cashback possible and pay off the balance every month.

Debt Reduction

If you have debt, you can use your credit card rewards to help pay down your balance. Although you can’t pay your debt directly with credit card rewards, you can often redeem them for a check or deposit into a bank account and then apply them to your outstanding balance.

Credit card companies make money from fees and interest, incentivizing their cards to be used for certain spending categories. Cashback rewards are an example of this.

The amount you earn varies by credit card, but it’s usually 0.5% to 3%. Some cashback cards offer a flat rate, while others have rotating categories or bonus-category spending periods.

If you want to get the most out of your credit card, you must develop a strategy to maximize your rewards. It’s important to remember that credit card rewards can tempt you to spend more than you normally would, so it’s best to use them for specific financial goals like boosting your emergency fund or investing.

Travel

Travel rewards credit cards are great for frequent travelers who take advantage of their perks but can be tricky. Understanding the redemption rates, blackout dates, and transfer partners is important before signing up for a card that offers airline and hotel loyalty rewards.

Plus, the value of frequent flyer miles and hotel points can decline as the programs alter their award charts. Cashback rewards, on the other hand, are easier to understand and can maintain value over time.

Still, a travel reward card could be worth it if you’re willing to work and pay an annual fee for a rewards card that fits your spending habits. But be sure you can pay your balance in full each month to avoid interest charges and keep your credit card rewards intact.