3 Ways Cash Back Credit Cards Can Cost You Money


Cash back credit cards are the U.S.’s most popular type of credit card — roughly 68% of Americans have one, according to credit card research by The Motley Fool Ascent. And what’s not to like? This type of credit card helps you save money by giving a percentage of your purchases back. The very best cash back cards, in fact, can earn 2% to 6% back on essential spending, like gas and food.

But even with so much earning potential, cash back cards also come with some risks. If you’re contemplating getting one, here are some ways they could cost you money that you should be aware of.

1. High purchase APRs

Cash back credit cards often have high annual percentage rates (APR), which is essentially the annual cost of borrowing money. For example, if your credit card has a 21% APR, you’d pay 21% of the outstanding balance each year.

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If you’re unable to pay off the balance on your cash back credit card, you might be charged interest that exceeds the cash back you’re earning. For instance, if you’re carrying a $1,000 balance on a card that has a 21% APR, you’d generate $210 in interest payments over the year. Even if you paid $100 a month toward your balance, you’d still be responsible for $109 in interest before the card was paid off.

To be fair, a 21% APR on a credit card is actually decent. In fact, the average APR on a cash back credit card is about 24.47%, according to LendingTree. Depending on your credit, however, your APR could be much higher than that.

That said, some cash back credit cards start you off with a period of 0% interest. Often dubbed “0% APR credit cards,” these cash back cards won’t incur interest for a specific timeframe, usually six to 21 months. This gives you some time to pay off your balance without paying interest. Once this period ends, however, the card will revert to a regular APR, and any unpaid balances will start to incur interest.

Of course, if you pay your statement balance in full each month before the due date, you won’t have to worry about interest at all. Just keep your card’s APR in mind if you can’t make a payment, as credit card debt can wipe away any rewards you’ve earned.

2. Hoarding cash back

Cash back isn’t immune to inflation. Just like the purchasing power of a dollar erodes over time, your rewards could become less effective the longer you wait to use them.

Of course, this can be tricky. After all, many credit card providers issue your cash back monthly, while some give you rewards on an annual basis. Likewise, you might be saving cash back to use toward a goal, like a vacation or big purchase. Unfortunately, during heavy inflationary periods, this could mean getting less value out of your cash back, as higher prices can divest your rewards of potential.

If you can help it, earn and burn your cash back. In other words, spend it as soon as it’s credited to your account. This works well if you can apply your cash back as a statement credit, as you can cover a portion of your spending immediately. If you’d rather save your cash back, try putting it in a bank account that can outpace inflation, like a high-yield savings account.

3. Getting a card with no annual fee

Cash back credit cards with annual fees can unlock a slew of lucrative benefits, like bigger welcome bonuses and higher earn rates. Often, these cards can be more profitable than no fee alternatives if your spending is high enough.

For example, let’s say your card has a $95 annual fee but earns 4% back on groceries and dining. Let’s call it Card A. Let’s also assume there’s a no-fee alternative that earns 3% back on those same categories. We’ll call this one Card B.

At what point does Card A become more profitable than its no-fee cousin? The magic number is $9,500. If you spend more than $9,500 annually on those categories, the annual fee card would start netting you more cash back. At $9,500, you would net $285 on Card A ($380 in cash back minus the $95 fee), while Card B would also net $285. So, if you spent $10,000 annually on food, Card A would bring you about $5 more than Card B.

Of course, this is an easy comparison. It can be more difficult if you’re comparing cards that have different rewards systems, let alone earning rates. But do the math for yourself. A card with an annual fee could surprise you, especially if it will reward you generously for your everyday spending.

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