Cash back credit cards: Are they worth it?

This latest credit card product is a double-edged sword. Beware before you get ensnared!

In inflationary times like ours when prices of all products are soaring high haunting common people, the only solace in such situation is cutting down on discretionary spending and opting for cash back or reward offers on credit cards.

However one must keep in mind that such strategies are used to push credit cards to more and more customers. Nowadays banks issuing credit cards are introducing new schemes and reward programmes to engage and compel consumers to spend more on a regular basis.

Cash-back credit cards entice consumers to spend more as these cards offer a certain amount of money, particularly a percentage of the user's bill, as cash back. Basically it is a special type of reward credit card that pays back in cash.

Whenever you use your cash back credit card to make purchases, a percentage of it is returned back to you. The cash back rewards can be redeemed as gift vouchers too.

The percentage of cash back differs from issuer to issuer. Normally it ranges between 2 per cent and 5 per cent but under some promotional schemes it may even go up to 10 per cent.

Cash back credit cards provide great benefit for consumers to get something in return for their spending. However, the cardholders should look very carefully at the pros and cons of their card offer in order to choose the best one with maximum benefit.

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Advantages of cash back credit cards

It enables the cardholders to save money by earning free cash on their purchases. Therefore it makes sense to use a cash back card for regular transactions and benefit from a reward schemes offered by the issuer.

It helps to improve credit rating because if credit cardholders pay for goods using a card and settle the balance in full and on time, it enhances their credit rating.

Some cash back cards offer bonuses for just signing up. And in some cases these cards also offer bonuses throughout the life of the card.

Some issuers do not charge an annual fee on a cash back card. This means if cardholders pay their bill in full every month, they need not worry about any fees at all.

Disadvantages of cash back credit cards

Cash back credit cards often encourage customers to make needless purchases which make it difficult to settle full balance at once and so the issuers get a chance earn interest from it.

Although customers earn money in cash back cards many card companies charge a higher rate of APR (annual percentage rate) from their customers. The interest cost of all cash back cards decreases the actual cash back customers will earn.

Some cash back cards restrict the amount of money that can be earned. For instance, some of the banks set a limit, say Rs 2,500 cash back per month and there are other sub-limits like for example, no single transaction can get cash back of more than a particular amount, say Rs 500.

Banks also prescribe a minimum transaction value, say Rs 500, entitle to get cash back. If a person pays a bill of Rs 350, s/he won't be eligible for cash back on that transaction.

Maximise the benefits

Today many people use cash back credit cards but most of them do not use them properly as they are not aware of the details of these cards. There are some points that one should always remember to get the maximum benefits from these cards.

In many instances, consumers try to avail a maximum percentage of cash back but it is not the only quality of cash back credit cards that is important.

Note that companies offer higher cash back on some purchases but there is no point in getting a card with a high percentage back on certain purchase if the customer is never going to use the card for that purpose.

Sometimes credit cards companies allow consumers to actually get the cash or to convert the cash to points. Therefore it is better to review all options before making a choice as points can be valued higher than the money you use in some cases.

There are additional bonus rewards on many cash back credit cards, like additional cash back to consumers, who wait till a certain threshold is reached before cashing in their credit.