Cash back credit cards are all the rave now, especially the 5% ones. Citibank has had their Dividend card giving 5% cash back for groceries, gas, and drugstores for years now. Chase then copied Citi with their own version. American Express and Discover now have ones with 5% off gas. But are they really that awesome?
I was catching up on some old Carnival reading and found this post on NoCreditNeeded about how cashback credit cards are crap. Granted, from the title of the blog you wouldn’t expect to hear praise for them, but there are some good points made. Of course, I disagree with some of them as well. Let’s hit each one:
People spend more with credit cards than with cash.
Overall, this is true. When McDonald’s started to allow people to use credit cards instead of paying cash, the average sale went from $4.75 to $7. I don’t know why this is true, but it is. On average.
Would I spend less if I carried cash instead? I can’t prove it, but I can honestly say no. If 1% cash back is going to make you rationalize spending more, then (1) you are really bad at math (1% of a $300 item you don’t need is just 3 bucks), and (2) yes, please shred your credit cards. As for myself, I’ve been using credit cards so long I don’t even think about it anymore.
The ‘protection’ by credit card companies is useless.
This may be a hassle for chargebacks, I’ve actually never had to do one. But, I have gotten my wallet lost or stolen twice. Cash lost: $200+ Credit Card money lost: $0. I got my recent fraudulent charge credited back to me with no issues at all.
Credit card companies are not stupid. They are around to make money.
100% Agree. They are there to make money. My friends use this one too. My reply is two words: loss leader.
Grocery stores are also not stupid and around to make money. You see the 99 cent gallon of milk? Or the $1.50 a pound chicken? If you walked in and only bought those two things and walked out, grocery stores would go bankrupt. But no. On the way to the milk, you see that cheese you like. Oh, and you’re out of peanut butter – why not try the new organic one? They are counting on you to make it up in the end.
Banks are also not stupid and like to make money. Capital One 360 used to let you open with $1 and walk away with $26. If everyone did this they’d be broke. (So they raised the minimum to $250. I guess this weeded out the people who couldn’t save $250 in the first place?) No, they want you to get nice and comfortable, and keep all your money there at 3% interest while they’re lending it out at 6%. Clever, eh?
Does this mean you shouldn’t shop at the grocery store or use banks?
The sad truth
The sad truth is that I know that the only reason that I can get money at 0% APR and make thousands of dollars off of it, is because my neighbor is going also do the deal, spend the money, and then want a nicer car and put off paying the balance when the promo period ends. Oops, nows he’s paying 18% APR. He’s also got the new ’06 BMW 330Ci. With the nice rims. And parks it right in front of my house. Bastard.
Therefore, my advice is the same as NCN – Be honest with yourself. But instead of a blanket statement, I would add that everyone is not the same. Some people should not have credit cards. As for me, I will continue enjoy the occasional cashback checks and free $100 bonuses now and then.
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Would all the dinks you made with your BT transfers and high balances affect your FICO score if you behave for a whole year or two? Also does having a long list of closed credit card accounts = bad? How many do you have closed?
And I think you should post this link up, it’s handy dandy :).
FICO Score Estimator
http://www.bankrate.com/brm/fico/calc.asp?lpid=BKRATE29
I agree with you 100%…I love credit cards.
As a matter of fact, I just finally used my discover cash back to pay toward my monthly balance (paid off every month)…about $400 bucks worth…granted it was for a couple of years worth of purchases, but that’s a lot of cash! (and yes, I should probably tap the cash back more often but I’m lazy at times…:) )
The other big benefit I see? Since our monthly credit card bill is about $1000, thats a grand of their money “floating” while I keep the cash in my bank account earning interest…$$$
I also agree with you, one can only effectively “use” credit card companies if they are disciplined spenders
I wonder if the poster on NoCreditNeeded ever heard of the expression “that money burning a hole in your pocket”? That expression came about when cash was king. So yes, credit cards make it somewhat easier to blow your money but I think that’s human nature to some extent or the phrase first mentioned wouldn’t have existed.
P.S. If you didn’t have credit cards you would probably carry a lot more cash around. Lose that and not have it returned and their is no protection.
I have a feeling the post on NoCreditNeeded was geared towards smaller/daily purchases. Like Jonathan and others have mentioned, the protection of a credit card (extended warrenty, bargaining power in transaction disputes, traceability) and the float are two huge benefits that a credit card has over cash.
Ultimately, one has to control their own spending. Credit cards are merely a means of payment, and a powerful tool at that. Don’t blame cashback credit cards for your own fundamental spending problems.
After having had the Amex BlueCash card touting “up to” 5% cash back, my average for a year is still about 1.01%… and I put EVERYTHING on the card (and pay it off each month).
The 5% is VERY misleading advertising, and almost everyone will still average only about 1% overall…
Dr. Rings
My credit cards need not fear that I will be removing them from pride of place in my wallet. However, the reason I use them and love them is because I am a city gal. Being born and bred on the mean streets teaches you to not carry more cash than you are willing to handover without a squeak if necessary (and when my Ninja moves just will not do). The wonders of credit cards these days is the ability to easily pay your bill at anytime online. So I charge stuff on the card (yes, getting those tasty rebates or reward points) and then login to my home computer pay the bill in full before the due date without even having to use a stamp. So I consider my credit cards as just “cash delayed” spending. They are paid in full each month and would-be theives are no richer if they target me.
If we can control ourselves, I think definitely we can enjoy using a credit card with cashback.
I always have the citi cashback card in my wallet and enjoy its cashback. I am the person who go to the grocery shopping in my household. So I can enjoy 5% cashback anytime I go to the grocery store.
Oh one more thing… household bank provides 2% cashback with any purchse. They don’t advertise it (I don’t know why) Anyway… last year, I got one promotional card from household credit card. They offered really sweet cashback program; 5% cashback for the first 6 months and 2% cashback after 6 months. I definitely accepted their offer and used it. I got almost $400 dollar which is their maximum limitation of annual cashback. Now they don’t offer 5% cashback anymore but they stiil offer 2% cashback. I use this card for my routine purchases except grocery, drug store and gas station (at these places, I use the citi card).
I am planning on getting the Chase Plus Rewards card for the 5% back at Wal-Mart super centers. We do all our grocery shopping there, and have only been getting 1% back from our MBNA card. I already have one Chase card that gives me Amazon rewards. Should I change this card to the Chase Plus Rewards, or just apply for a brand new Chase card?
19 years old here and no credit cards… yet. Better safe then sorry at this age! 🙂
Russell, I am 20 and I got my first card when I was 18, feshmen year of college. I now have a really nice credit line. Some of my older friends have a lot less credit if any at all. You should really begin now. It is all about discipline like Jonathan said. Get a credit card but simply buy one reoccuring thing, ie. gas. Only charge gas on the card and pay it off in full every month.
If it wasn’t for credit cards we couldnt not have more than half of the things we own. Look at the history of credit. It started, I believe, with GM giving credit to it’s customers so they were able to sell more cars. This impacted the economy and the automobile was seen everywhere. Look around you today. Some cities even have more cars than people ie. LA.
Credit Cards are GOOD.
No one has mentioned the value of using cash back cards on business trips where you are reimbursed. I probably have $5,000 or so in expenses each year that I charge on my card, then pay back when my company cuts me a check (always before the card bill is due). Even at 1%, you can get a nice amount back for free — plus, it helps to get me to the highest % back level with the Amex card I use.
Where is there information on the “household credit card” which gives a full 2% cash back on purchases (as mentioned in the post by Jane Dough)?
To Dr. Rings:
The key to making the most on the “5%” cards is to know the rules and exploit them. Right now I have three cards I normally use:
1. Discover restaurant: 5% on restaurants
2. Citi Dividend: 5% on gas, groceries, and drug
3. BankOne Cash Rewards: 1% on everything else.
I would agree with you that the 5% advertising on the AMEX card is very deceptive because of the tiered rewards. Same as the regular Discover card. You may get 5% on the purchases after you have spent $5000, but relatively speaking you don’t get squat until you get to that point.
I think that if you are on top of your budget and spending and pay your balance off every month, than using generous (as opposed to deceptive) cash back programs can be very beneficial, but as most folks are saying here…it’s just not for everyone.
And these cards are getting probably at LEAST 3% from the merchant to process your purchase, so it’s almost as if the card is splitting the merchant’s fee with you. They are still making TONS of money on the volume of transactions (more than enough to offset the 5% rewards)
Alice, I don’t think they offer it anymore. I also have this card. Full 2% cash back on everything. They send you a check upon your request once you accumulate $25, which is much better than a year wait with AmEx blue cash. There was a short promotion about a year ago. I received an offer in the mail in November or December 2004. The promo ended couple months later and since then I’ve never seen anything as sweet. Those lucky who snatched it back then are still enjoying their 2%, for more than a year already.
HSBC jumps to 4.8 % link
holy hsbc.
One thing to think about with reward cards is what you want to do with the reward. If you do not travel much than cash back is the way to go. If you are a traveler than the miles card is way better. I recently read you could fly to Europe with 25,000 miles on your card. Most cards give 1 mile per dollar spent. If you were to save upfor that trip with a cashback card you would have to spend close to $500,000 on the card to get enough cash back to buy the ticket.
iyou like miles you can get 15,000 miles just for opening an account with this citibank card. you get additional miles just for flying, you don’t even have to buy anything. 25,000 points and you get a free ticket. i’ve never heard of any airline giving away a europe ticket for 25k. where is that??
“I am planning on getting the Chase Plus Rewards card for the 5% back at Wal-Mart super centers. We do all our grocery shopping there, and have only been getting 1% back from our MBNA card. I already have one Chase card that gives me Amazon rewards. Should I change this card to the Chase Plus Rewards, or just apply for a brand new Chase card?”
When you shop at Wal-Mart Super Center it will be classified as general merchandise/retail. The 5% cash back is for grocery stores, i.e. stores that sell primarily groceries and is independent of the actual product that is purchased. I thought the same thing about Wal-Mart (get 5% on groceries) until I read the fine print. Also, my Discover card classifies Wal-Mart as general merchandise/retail instead of grocery store.
Actually, there is plenty of anecdotal evidence that Walmart Supercenters are classified as Grocery Stores for the purpose of the 5% cash back for the *Chase* 5% card. Of course, your mileage may vary, but enough people have reported it that I would at least try if you shop at Super WallyWorld regularly. It will not work for Citibank 5% Card (at least not anymore). Not sure about Discover.
Anybody know of any other good restaurant cashback cards besides Discover?
(Don’t get me wrong, I love the Discover Card, but I still run into a lot of places – mostly restaurants – that won’t do anything but Visa or Mastercard.)
Remember, credit card companies also charge merchants a percentage of each transaction usually 2-3%. Thus, the cashback you receive is really just a refund of a price markup that is built into the prices of goods you buy.
Brian, I would recommend getting a credit card sooner rather than later. Having a good credit history will help you secure loans in the future.
Now is a good time to learn financial discipline- it will serve you well the rest of your life.
I agree that “the cashback you receive is really just a refund of a price markup that is built into the prices of goods you buy,” so I certainly don’t complain when I run across a merchant that doesn’t take cards, since it’s probably the best deal for both of us in the long run.
I tend to think credit cards are like alcohol–they are basically good things, but if you have ever gotten into trouble with them then you have to forswear them forever. So I certainly don’t make fun of people who don’t use cards, any more than I would make fun of an alcoholic for not having a drink.
I tend to think that cashback is a minuscule little ingredient with which the card companies have laced their enticing products in order to make them even more appealing to the potential addict in each of us.
Dan – The Citi Professional card gives you 3% back a Restaurants, and is a Mastercard. Link
Usually if you get anything more than 1% back, there’s either a monthly/yearly limit on the higher-percentage rebates, or the higher rebate kicks in only after you’ve spent $X on the card. The rebates are only good deals for convenience users of CCs (ones that pay off the balances in full). And these are the same people that, if there were no limit, would end up costing the CC company money on every transaction by using their card only for high-rebate purchases. (Heck, it’s what I try to do!) They can give back 1% forever because the fees that they take from the merchants are usually north of 2%.
I’ve been using the American Express Cash Rebate Platinum Card for a while. It maxes out at 1.5% (if you pay your balance off at the end of the month, which I do). The thing I like about it is that there is no maximum, and after $5,000, it’s 1.5% on everything.
I’m self employed, and get reimbursed for a lot of expenses. This is mainly hotel stays, or flights on Air Canada to Toronto from NYC, but normally I charge about $100,000 per year on the Amex, and maybe another $10,000 on a generic Visa card with no benefits (used only when they don’t take Amex). Basically, I charge everything I can, as does my wife, and then the balance is always paid off at the end of the month. I have no interest in miles, as my wife’s mother is a flight attendant at a major airline, and we can fly on her passes for a nominal fee in first class.
I think I’m going to switch to the Fidelity 529 card, which gives 2% cash back, but which has a $1,500 maximum reward. That’s good for $75,000 worth of charges. So I think I’ll also get one of these 5% cards so that I can use that at Supermarkets and Drug Stores and use the Fidelity card everywhere else, and only use Amex in those rare cases where the store only takes Amex (the only one I can think of is Costco, and I don’t know if that’s still the case). Amex pays their annual bonus in February, so this is why I’m looking around now for a different card to use.
Since I charge a lot of stuff, and a lot for clients, one thing that is important is that I am able to download my charges into Quicken automatically, and Amex works well for this.
I’m surprised that many of these credit card companies max out their rewards. You’d think they’d want to encourage a lot of spending on them, but I guess they don’t want businesses using them instead of their corporate cards, which have high fees and which they don’t need to pay cash back or whatever.