Part III of the Credit Card Series: Start at the beginning if you missed a part. And if you can only read one paragraph, start with the last one.
Who does not like a discount? This is what cash back is, if you carry a balance. If you pay your credit card off every month, you may get a check from the credit card issuer.
While the percentages vary widely among cards, and even among types of cards by the same issuer, in the end, it all adds up to saving money. Although industry standard is 1% cash back, many cards offer specialty spending categories which earn more and some offer tiered rewards based on how much you spend.
If you spend an average of $500 per month on your credit card, with 1% cash back offered, you save $60 per year. While this does not sound like much, consider the savings in interest charges. Remember the $1,000 cash advance from Part II? If the $60 stayed on your credit card, it would gather $13 in interest before you could pay it off paying the minimum each month. So, your 1% savings just jumped to $73.
Specialty cards offer discounts and free merchandise or services to consumers who spend money in specific categories. The most common application is the “frequent flyer miles” rewards program. For consumers who travel, saving on airfare can net big dividends at the end of the year.
Typically, miles are earned on each airline ticket purchased. Once enough miles are accumulated, a complimentary flight is offered. Some credit cards offer a conversion of miles to actual credit for travel associated purchases, such as rental cars, hotel stays and vacation packages.
Other perks include free tickets to sporting events or theme parks, discount telephone service, carbon offsets, free credit scores, charity donations (many coupled with cash back on eligible purchases) or access to exclusive golf courses or airport lounges.
Perks and cash are always welcome rewards, but do so with caution. Reward credit cards carry as much as 15% higher interest than their vanilla companions. If you are choosing to save with cash back, pay off your card every month to avoid paying it all back.
Make sure you read the fine print on how you can accumulate rewards, when they expire and how you can use them. You may have to spend thousands to get a $300 plane ticket.
Weigh the rewards against what you have to spend to get them. Do not rely on the screaming advertisement to choose your card. If you apply for a rewards card, or any other credit card, it will mark your credit report. Do not apply for a new card if you are in the market for a traditional and/or large loan, like a mortgage or vehicle loan.
Next, have you ever wondered how credit cards affect your credit score?
(c) Ann Marie Dwyer 2011
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