Apr 1: A look at the pros and cons of using cash back credit cards

April 1, 2024

Back in the day, when colour TV was a new thing and there was no Internet, a “charge card” was a way to pay for things instead of using cash or a cheque.

You didn’t get anything extra in those early days – just a bill in the mail.

But over the intervening decades, credit cards (as they have been rebranded) now offer a dizzying array of extras – points to help you pay for travel, coffee, and other perks, or cards that offer you cash back on purchases.

Save with SPP decided to take a harder look at cash back cards in particular.

They are very popular, reports The Motley Fool blog.

Over 56 per cent of Americans have cash back cards, the blog notes.

“Cash back cards offer a straightforward deal. Pay with your card and earn a percentage back on your purchase. It’s a valuable benefit, easy to understand, and consumers love it,” the blog reports.

Strategically speaking, The Motley Fool lays out two ways you can go with cash back cards.

“If you want to keep it simple, you could use one cash back card for all your regular spending. There’s nothing wrong with this method, but there’s also a way you could earn much more: carrying multiple cash back credit cards. Because when you don’t mind adding another card or two to the mix, you could potentially double your cash back,” the blog suggests.

Most cash back cards, the article continues, allow you to select two or three categories (say, gas, hotels, groceries) where you get extra cash back on top of the typical rate (between one and two per cent). So, The Motley Fool suggests getting a couple, so you can max out on more categories.

OK, either try to put everything on one cash back card, or have a couple and use them for the “bonus” categories.

It’s important to remember that like any credit card, the benefits of cash back only matter if you pay your card in full each month, reports The Points Guy blog.

“As long as you pay your bills on time and in full, you’ll likely avoid any sort of fee altogether and be able to focus on earning more cash back for the purchases that matter to you,” the blog advises.

The blog makes the point that getting cash back is easier to manage than having to figure out how and where to cash in points.

What cash back cards are available to us Canucks?

According to MoneySense all the major banks, Tangerine Bank, MBNA and American Express offer cash back cards.

The magazine reports that if you were to spend $2,200 a year on a cash back credit card in Canada, you would “earn” between $331 and $1,256 per year.

Those amounts are net of annual fees, which ranged from zero to $139 per year.

MoneySense urges Canadians to shop around before they decide which card to choose.

“Cash back credit cards are an extremely popular type of rewards card in Canada. Each cash back credit card has its own features and benefits, so you’ll want to compare the annual fee, earn rate and any additional benefits before you apply,” reports MoneySense.

The best cards, the article notes, have a two per cent earning rate on all categories, “so that you can get the most out of every dollar spent.” Some connect to other benefits offered by the credit card company, also a plus, MoneySense notes.

Some cards are not as widely accepted as others, the article notes, so that should factor into your research. Also, how the cash back is paid can vary from seeing a deposit in your chequing account each month, or to getting a monthly statement credit (not really cash back but credit back), or even only an annual credit.

Read the fine print before you sign up, advises MoneySense.

This type of credit card – in fact, any credit card – should get paid off in full every month, MoneySense notes.

“The payoff with a cash back credit card is the cash—a reward that is easily cancelled out by the penalties and interest accrued if you carry a balance. Like all rewards credit cards, cash back cards tend to carry annual interest rates at the higher end, usually around 19.99 per cent. At this rate, unpaid debt will rapidly accumulate interest charges that eat up any gains you’ve made. As long as you pay off your balance in full every month, you’ll avoid this pitfall, but if you find you regularly carry a balance, you might consider a low interest credit card instead,” the publication adds.

This is very sensible and important advice. If you aren’t planning to pay off your credit card balance each month, you are going to be paying more in interest than you are going to receive in “free” cash back. If you are disciplined, and pay off your entire credit card statement each month, then the cash back approach may actually work for you.

We used our cash back money to make Saskatchewan Pension Plan contributions! SPP members can fund their accounts in multiple ways – you can set SPP up as a bill and “pay” yourself online, or you can have amounts withdrawn automatically from your chequing account. You can even make a contribution with a credit card – so cash back on retirement savings is a possibility.

Join the Wealthcare Revolution – follow SPP on Facebook!

MoneySense, The Motley Fool, The Points Guy

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