Cash-back credit cards are the latest hot trend in plastic.
According to LowCards.com, in the third quarter of 2010, 41% of
credit-card offers involved cash-back cards, up considerably from
just 28% a year earlier. For all of these cards'
, Fools should be wary of their hidden dark side.
Researchers at the Federal Reserve Bank of Chicago recently
discovered what banks had probably already figured out: When
cardholders are offered cash back, they tend to spend more, and
rack up more debt. With an added 1% cash-back reward, the Fed found
that cardholders earn an average of $25 in cash back per month. But
they spend $68 more per month, and pay off less of it, increasing
their overall debt level.
Don't believe the hype
Card issuers are getting aggressive.
) Chase Freedom Visa recently offered $100 for customers who spent
$500 in their initial six months. While that sounds tempting, the
fine print reveals that the card caps the popular 5% cash-back
rewards it offers on certain spending categories at $75 per
quarter, after which the card's standard 1% reward applies.
) Citi Platinum Select card limits your rewards to $300 per
You might have been tempted by
Discover Financial Services'
) Discover More card, with its 5% cash back on travel and
restaurant purchases made over the first quarter this year -- but
eligible purchases were capped at $800, meaning that the reward
tops out at just $40. Before you sign up for any of these cards,
run the numbers to make sure you're really getting everything you
The more you spend, the more the issuing banks make on each
transaction. Interestingly, these cash-back cards also motivate us
to pay with them, when otherwise we'd have used cash or another
credit or debit card. Thus, the banks grab a bigger share of our
That said, if you can keep your spending in check, at least some
of these cards are definitely worth investigating. The Discover
More $100 Cash Back and Chase Freedom $100 Cash Back cards won
praise from LowCards.com, along with
) Blue Cash card, the PenFed Visa Platinum, and the True Earnings
card, which is offered through
(Nasdaq: COST) and American Express.
Study each candidate's details
, and remember that in general, such cards carry higher interest
rates. If you don't pay your balance in full each month, those
interest rates can rapidly outpace any rewards you might receive.
When it comes to cash-back cards, make sure they're the ones paying
you -- not the other way around.
Double-check that none of
the worst credit cards
lurk in your wallet.
American Express, Costco, and Discover Financial Services
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