There’s one situation when having a cash back credit card is worth it. That’s when you pay your credit card obligations in full each time. For most rewards credit cards with cash back schemes it’s typical to have a cash back rate on all your purchases at around 1% with most enjoying 0.5% while special promotional rebates on certain types of purchases could go up to 2%.
All these rebates generally get aggregated and gets back to the consumer in the form of a check or credited back to your credit card account at the end of the year. But when you only pay the minimum monthly dues or leave a substantial balance behind each time, you’d be paying the standard APRs which are typically 3% to 3.5% per month on outstanding balances. This totally wipes out any gain you get from cash back credit cards.
Also bear in mind that rewards credit cards have a higher APR than regular credit cards. But you don’t see these cards often as almost all the major credit cards circulating in the debt-ridden British shopping landscape are rewards credit cards more than half of which provide cash back shopping incentives.
Spending to Save
For consumers, rewards credit cards are about saving while shopping. You earn points each time you use your card and when they accumulate to a certain level, shoppers can redeem them for merchandise items or shopping discounts. Lately, cash back credit cards have become the most popular form of rewards credit card where you get anywhere from 0.5% to as much as 2% of what you charge on your card back to you.
It’s basically equivalent to getting a 0.5% to 2% discount on your purchases, only this time, the discounts accumulate after you’ve made your purchases and you get it back after a year. It’s a creative way for banks and card issuers to entice the British consumer to shop more using their cards.
The more you shop, the more you save. In the meantime, those savings are essentially deferred payments that earn money market interests for banks and creditors. Excellent idea: it’s a win-win scenario for banks and consumers.
But Only When You Pay In Full
You get to maximise your savings potential when your cash back credit cards are paid in full every billing period because you get the full credit line available for shopping each month which gets you the most from its cash back rates. If, say, you have a credit limit of ₤1,000, you can get a ₤20 rebate each month assuming a 2% cash back rate when spending your full credit line provided you pay the bill in full every month.
But if you leave a revolving balance of ₤500 every month, you only get ₤10 cash back each month when using half the revolving credit. That gets wiped out as you’d be paying 3% interest on the ₤500 balance every month, or ₤15. It gets worst when you only pay the minimum each time.
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