Benefits and Risks of Cash Back Credit Cards

Cash back credit cards reward your purchases by cutting you a check in a given amount each month or year. The check represents a portion of all the purchases you made on the card. If you use your card a lot, this check can be issued in a very substantial amount, which greatly incentivizes your spending on the card. While this is beneficial in many regards, it can also be a spending trap for people who are not disciplined with their credit.

Pro: Flexible Reward System

With a number of credit cards, the reward you receive is set. For example, an airline rewards card will provide you only with airline miles. At times, this can be very useful. At other times, the most useful thing you can receive is extra money. With a cash back card, you can use your reward any way you see fit. This can be spent on your travel, luxury expenses or even simply to repair your car when you do not have the cash on hand. This flexibility is extremely attractive to most borrowers.

Pro: Reduced Impact of Interest Rates

When you use a credit card, you pay interest rates. Any rewards program is designed to give back and help reduce the impact of this interest rate. If you are disciplined and pay off your balance each month, your rates will never compound. This can keep your financing costs low regardless of your interest rate. A cash back card rewards you based on what you spend, not based on your balance. For this reason, as long as you are going to spend money, it makes sense to place the expense on the card. You will receive a cash back incentive, you can pay down the balance at the end of the month, and you will ultimately net a very low cost with the cash back card when compared to simply paying cash for the purchases.

Con: Incentivized Spending

Unfortunately, few credit card users truly have the discipline to use credit responsibly. The cash back system benefits you compared to paying cash only if you were going to make the purchase anyway, and you are buying something you can afford. If you spend more with a credit card than you would if you paid cash, you will not benefit from the cash back system. In fact, you may end up building up debt. You are not rewarded for revolving your balance; this will only cost you money.

Con: Minimal Reward

The cash back percentage you receive on the card is always far lower than the interest rate you are charged. The interest rate covers the cost of processing and includes a profit for the credit card company. The company cannot give too large a percentage in return to its customers because it will fail to turn a profit. In the end, you are receiving a very minimal amount back for your large purchases. This is useful only if the reward rate on the the cash back reward is close to or greater than what is offered by other rewards programs.

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