If the words “free money” are music to your ears, credit card companies are playing your song. But grabbing cards that offer cash-back rewards and signing bonuses could create problems for your finances.
While points and privileges still abound, card issuers these days are increasingly wooing prospective customers with cold, hard cash. Some dangle bonuses of $100 or more for enrolling.
The incentives won’t make you rich, but you don’t have to be Gordon Gekko to find them tempting.
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Why Free Money Offers Hook Us
“Everybody likes something for nothing,” says Olivia Mellan, a psychotherapist in Washington, D.C., who specializes in financial issues. “But it goes deeper than that. Money means love, power, control and security.”
Szifra Birke, a consultant on financial behaviors in Chelmsford, Mass., agrees. “We’re hard-wired for immediate gratification," she says, "and cash back seems pretty immediate.”
If you want to keep your own financial behavior under control, though, it’s wise to remember that credit card companies aren’t philanthropies. To get your hands on their money, you’re going to have to spend yours.
You may be surprised to learn that you typically won’t get a credit card’s signing bonus until you make enough purchases to fulfill its requirements. For example, to get Chase Freedom Card's $100 bonus, you must first spend at least $500 with the card during the first three months.
“Cash-back cards can really disappoint you if you don’t choose them well,” says Beverly Harzog, a credit expert and blogger based in Johns Creek, Ga. “The payback is in the details.”
To come out ahead, here’s what to keep in mind:
Don’t try to game the system. Maybe you’re thinking that you’ll get several new cards with signing bonuses then cancel them after receiving the cash. Not so fast. Cancel any of the cards and you may ding your credit score.
Remember: Credit scores are partly based on the percentage of available credit you’re using — the lower the percentage, the better your score. So if you cancel a card, your percentage rises and your score could drop.
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What’s more, if you don’t use cash-back cards enough, you might forfeit your rebates. And if chasing rebates causes you to overspend, you’ll do even more damage to your finances.
Don’t be dazzled by cash-back offers. Do the math. It’s easy to get lured by eye-catching cash-back rebates of 2 percent, 3 percent or even 6 percent of what you spend (rebates are typically 0.25 percent to 1 percent). What you may not realize, though, is that the higher rebates may be restrictive or tough to get.
For instance, American Express’s Blue Cash Everyday Card returns 3 percent on groceries only and 2 percent on just gas and certain department stores. The rebate on everything else is 1 percent.
Some cards switch their higher rebate categories often, making it harder to rack up the deals.
The Chase Freedom card, which normally offers 1 percent rebates, bestows 5 percent on up to $1,500 spent during the quarter in select categories, like restaurants and travel. The catch? Those categories change every three months. In addition, you’ll receive the higher rebate only by explicitly signing up for it online or by phone. Forget to do that and those rewards might never materialize.
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In other cases, you’ll receive the inflated rebate only by agreeing to pay an annual fee for the card. American Express’s Blue Cash Everyday Card normally has no annual fee, but the Preferred version doubles your grocery rebate to 6 percent and ups the gas rebate from 2 to 3 percent if you pony up $75 a year. (The CardHub website just named the Amex Preferred card one of the best cash-back credit cards of 2013.)
You’ll rack up grocery and gas rebates much faster on the Preferred card than the standard Blue Cash card, but some of those rewards will amount to payback for the annual fee. And after you’ve spent $6,000 on groceries in one year, both the Preferred and the Everyday card drop you back down to 1 percent.
Before getting a revolving credit card, be sure you know the interest rate — and what it could become. The rates on these cards may seem low, but they could well be promotional rates that will soon soar. The Chase Freedom card, starts with a 0 percent rate for 15 months then morphs into a variable-rate card whose interest rate could be as high as 22.99 percent.
Read the fine print. All cash-back cards come with rules about expirations, forfeitures and redemptions. For example, if you go 18 months without using your Discover It card or miss two consecutive minimum payments, you’ll lose any accumulated rebates you’ve earned.
With some cards, you might wind up leaving money on the table when you’re ready to cash in because they only pay rebates in $25 or $50 increments. Irregular amounts, like $19, must remain in your account until they rise to the required minimum for payback.
Get help before signing up. If figuring out the right choice for a cash-back card sounds like work, it is. Fortunately, plenty of websites offer head-to-head comparisons, like Bankrate.com. On NextAdvisor.com (formerly ConsumerCompare.org), you can enter your spending patterns and learn how much cash you’d collect from about a dozen cards.
Even the rating sites don’t include every cash-back card, though, and it’s worth noting that the sites often get paid by credit card companies for new sign-ups.
One more thing: card issuers can change their terms about their rebates and bonuses at any time. It’s right there in the fine print.
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