Citigroup (NYSE:C) recently launched the Citi Double Cash card, which offers the best cash-back rewards program among all major U.S. credit cards. Basically, cardholders receive 1% cash back on every purchase that they make, but then get an additional 1% back on the portion of the balance they pay off each month, effectively making the total cash back an industry-best 2%.
While there is no question that the rewards here are excellent, and will undoubtedly attract a lot of customers, I can't help but wonder if this is a good or bad thing.
Will this card give customers more incentive to pay their bills in full each month in order to maximize their rewards? Or will the fantastic rewards tempt cardholders into spending more money and carrying a balance?
The Double Cash card -- the fine print
The card has no annual fee and doesn't limit rewards, but transactions like balance transfers and cash advances don't earn any cash back, nor do any interest charges. And rewards are available as cash, gift cards, or a statement credit once they reach the threshold of $25.
Other than that, there really isn't a catch. The Double Cash card's 2% rewards rate is just as generous and competitive as it sounds. It also comes with a pretty generous 15-month introductory 0% APR on purchases as well as balance transfers.
Better than the rest
There are other cards offering rewards at a similar rate, but they generally come in a different form. For example, the Capital One Venture Rewards card offers 2% back in miles, not cash.
And some other cards offer up to 5% cash back, but only on purchases in certain categories that rotate each quarter. Plus, many of these cards require you to sign up for bonus rewards periodically and put caps on the amount of 5% rewards you can earn. For example, one card currently offers 5% back on up to $1,500 in gas purchases.
What people should do
Advocates of the new card say that the 1% bonus cash back could be an incentive to pay off the balance fast, or in full.
This should be a no-brainer. In fact, carrying a balance on any rewards credit card (unless you're in a 0% introductory APR period) defeats the purpose of earning rewards in the first place. In other words, who cares about getting 2% cash back if you're paying 17% annual interest on your purchases?
Smart consumers know that reward cards only work in their favor if the balance is paid off in full each month. If you do this, the credit card company is effectively paying you to use their card and you actually come out ahead by charging your everyday purchases.. And, by this logic, the new Citi card is best-in-breed as far as cash rewards is concerned.
What people might do
However, bear in mind that credit card companies use reward programs for a reason. Specifically, they want to entice consumers to use their cards more than they normally would in the pursuit of cash back, airline miles, or whatever the card offers.
And the fact that the card comes with a 15-month 0% introductory APR only makes it more enticing to run up a balance. For consumers who carry a balance, there are cards with lower, permanent interest rates, such as the Barclaycard ring card, which has an everyday APR (not just an introductory rate) of just 8%. Citi's card has a permanent adjustable rate anywhere from 12.99% to 22.99%, depending on the credit score of the applicant.
Not for everyone
The Citi Double Cash card could indeed be a great credit card for disciplined consumers who know how to make rewards cards work to their advantage.
However, if you're prone to excessive spending just to get rewards, or if you tend to carry a balance, you may be better off with another card with a lower APR.
Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Capital One Financial., Citigroup, Discover Financial Services, and JPMorgan Chase. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.