"The only reason a great many American families don't own an elephant is that they have never been offered an elephant for a dollar down and easy weekly payments."
-- Mad Magazine
Mad Magazine is right -- many consumers live beyond their means when they have access to easy credit, and that's how many fall deep into credit card debt and financial trouble. Credit cards aren't all bad, though: For those card holders with the discipline to only charge what they can afford, credit cards are very convenient. And even better, many great cards will even give you cash back on your purchases.
Here are three handy tips to know as you go about choosing and using a cash-back credit card.
Tip No. 1: Reconsider, if you're deep in debt.
First off, while the idea of getting cash back every time you swipe your credit card may be tantalizing, it's not best for everyone. There are many different kinds of cards, and depending on your financial situation, a cash-back card might not be what you need right now.
For example, if you're carrying a lot of credit card debt -- which typically is high-interest-rate debt, costing you heavily -- your main priority should be to pay off your credit card debt as soon as possible. Thus, your aim should be to swipe your credit card infrequently while you spend less and save more. And even more importantly, there are credit cards that can really help people in debt, such as low-interest-rate cards and balance-transfer, or 0% APR cards.
If you think you can pay down much or all of your debt in a year or two, you might be well served by a balance-transfer card that features a 0% interest rate for an introductory "teaser" period that can be as long as 21 months. If you think it will take you a long time to pay off your debt, a low-interest-rate credit card could be best, so that you're paying less in interest. (Still, if possible, aim to pay off that debt as soon as you can.)
Tip No. 2: Choose the right card for you.
If you're not in debt and you'd like to enjoy a little cash reward every time you charge something, then do consider a great cash-back credit card. Just spend some time doing your homework first, as there are many such cards and some will serve your needs much more than others.
Some cash-back credit cards offer a flat percentage back on all purchases. Others have tiers of percentages applying to different expense categories. Still others offer big rewards on a purchases in specified spending categories that rotate every few months. Some cards offer a combination of these features.
To make the most of one or more cash-back credit cards, think about your spending habits. For example, if you charge a lot at many different places, you might opt for a general-use cash-back card. You'll find some general cards paying as much as 2% back on everything.
On the other hand, if you spend a disproportionate sum at Amazon.com (NASDAQ:AMZN), you might want a card that gives you a generous percentage of cash back at Amazon. Many other retailers, such as Costco and Target, cards that give you cash back or discounts on all purchases from them. Think, too, about categories you spend a lot in, such as supermarkets or gas stations or travel. Each of us has a different spending profile, and some of us would do well with a card that gives us, say, 6% back on supermarket spending, while others might end up with more cash via a card that pays us 5% back on gas-station spending. If you tend to spend a lot in certain categories at certain times of the year, you might look for a card that lets you designate the categories in which you'll earn, say, 5% cash back each quarter.
Looking beyond the cash-back percentage, aim to get a card that charges no annual fee. Most cards these days don't charge them -- though some do, and sometimes they're just worth it. If you're paying $95 per year and collecting $600 in cash back, the annual fee can be just fine. (Better still, you might get it waived or reduced just by asking. Many cardholders have had great success just by asking.)
Try very hard to select a card with no "penalty APR," too -- and perhaps make it a requirement as you shop for a card. Many cards will jack up your interest rate to a very high level (25% to 30% is common) if you're late with just one payment. That's called a penalty APR, and it can immediately turn a little mistake into a major financial blunder. It might even end up costing you more in interest than you're earning in cash back! Lots of cards do not feature penalty APRs. Favor those cards.
Tip No. 3: Don't spend just for cash back.
Finally, while it's very satisfying to see the cash-back dollars pile up, remember that they're piling up only because you're spending. Resist any temptation to spend more and more to earn cash back. Don't look at various possible purchases as being on sale because you'll get 3% or 5% back on them.
That applies for sign-up bonuses, too. Some cards will tempt you with massive rewards just for signing up. They might dangle 50,000 of their points or offer you several hundred dollars to get their card. These bonuses typically have spending requirements, though, such as spending $1,000 or $3,000 in the first few months after you get the card. If that fits your usual spending patterns, there's no problem. But if you will have to spend more just to get the bonus, then the proposition might actually be counterproductive for you.
Give cash-back credit cards consideration, as they can put hundreds of dollars back into your pocket each year -- if you choose and use them wisely. Note, too, that some of the best cards require high credit scores, so consider spending some time working on increasing your credit score, too.