Cash Back credit cards
Cash back credit cards share the rewards that credit card issuers reap
from merchants who accept the cards. Businesses pay for the privilege of
being paid via plastic. If they did not accept this form of payment,
their business would decline sharply. For this reason, they are prepared
to pay card companies a percentage of sales made on the cards. And some
cards are willing to share this income with you.
The first cash back program was launched in about 1990 and is
particularly appealing to those who pay off their credit card balance
each month. People love to save money.
Benefits changed for some
In the early days, these programs typically carried a flat rebate
percentage rate, often 1% of purchases. This was usually paid by check
at the end of the year, or through credit on the monthly statement.
However, some banks found 1% across the board a little too rich for
their blood. Enter the tiered earnings system, in which rebates were
reduced to a fraction of 1% below a certain high threshold, and 1% over
the threshold – which can be in the order of $2,500 a month.
There are still some juicy rewards, however, that do not rely on
spending limits. Citibank offers several cards that pay a flat 5% on all
grocery, gasoline and drug store purchases, plus 1% on all other
purchases. Chase offers a card with similar rewards, but adds 5% cash
back for home improvement store purchases. The Discover Platinum Gas
Card offers an enormous 10% rebate on gas purchases and 2% on all other
There are no annual fees for any of these cards, which had an APR of
from 8.99% (Discover) to 13.74% (Chase) in May 2005. All have zero APR
on balance transfers, and all, as might be expected, require excellent
to good credit ratings.
Claims forgotten by many
Another change compared to earlier days is that cardholders in most
cases need to request their rebate check once the amount has reached a
certain preordained level. Make sure you check your statement or call
the card issuer to discover your balance. The companies count on a
certain number of cardholders not claiming their rewards. This is called
"breakage" in the industry.
Not all cash back cards are created equal, and it is necessary to do
your homework to select the one that's right for you. The flat rebate
cards are easy to compare, but not so the tiered cards. Not only do you
need to look at the percentages paid at various levels, but you also
need to consider the break points – the value of spending that raises
the cash back to the next level.
How are you paid? Also important to consider is the method by which you
are paid. The easiest method for the banks is to deduct your reward from
your outstanding balance, but that might not seem nearly as satisfying
to you. Some companies mail a check at the end of the year, or once the
reward reaches a certain dollar level. However, if you are required to
claim the money, there is a possibility you will forget it. If the money
comes at the end of the year, it can help pay for those heavy holiday
expenses, or to pay a little extra on your mortgage. If you count it
merely as extra pocket money, it will disappear as if a puff of smoke.
Other possibilities are to put the money into an education savings plan,
an investment account, or a vacation fund. Get some lasting benefit from