If you use plastic for the bulk of your spending, it's easy to assume that credit cards with cash-back features are a dream come true. These cards allow holders to regularly recoup in cash a percentage of what they spend. As recently as a year ago, rebates were running as high as 5% of amounts spent. Lately, many have dwindled to 3% or less.
While the main attraction of such cards has diminished, the negatives have mounted, too. That's because card companies, in an effort to boost revenues, are jacking up interest rates on balances not paid off.
Before the recessions set in, the American Express Blue Cash card carried interest rates no higher than 13%, notes Jeffrey Weber of SmartBalanceTransfers.com. Now card applicants with excellent credit histories might get a 17.2% rate, while those with spotty records could end up paying 21.24%.
Further dampening the benefits of cash-back cards is the complexity that issuers cram into the terms for reaping the biggest rebates. Often, gas and grocery rebates are higher than those for other purchases.
Say you use plastic to the tune of $800 a month: $120 for gas, $240 for groceries, $50 at a drugstore, $120 at restaurants, $50 for entertainment, $70 for your cell phone and $150 for miscellaneous spending on clothes, home improvements and other goods. Setting aside any vacation spending, with the expenses above you'll be charging $9,600 annually to your card.
If you've got good credit and apply for, say, the Bank of America Cash Rewards Visa Signature Card, you'll be eligible for a 0% interest rate for your first 10 months and 13% after that. (Those with bad credit would have a seven-month interest holiday and a 21% rate afterward.) Regardless of credit history, you'll get 3% cash back on gas, grocery and drugstore charges for the first six months and then 1% back on the same purchases. All other charges generate 1% rebates. That leaves you with $145.20 cash back for your first year.
No matter how large a balance you run up the first year, you're going to have to pay interest on it only for the last two months. Your cash back will, in all likelihood, more than make up for those debt service payments.
Suppose in your second year your cash back falls to $96. Your imperfect payment record has prompted Bank of America to raise your interest rate to 18%, and your balance has ballooned to $1,200.
Now your interest payments are accruing at a rate of $216 a year, with your cash back covering less than half of it. Your total cost would be the same if you'd chosen a credit union card bearing an interest rate of 10% (yes, they do exist). Unlike card companies, credit unions aren't allowed to charge more than 18% on consumer debt.
