Attention Costco Shoppers: You May Have the Wrong Type of Membership

You need to read this to make sure you have the right membership tier.

When you sign up for Costco, you have a choice of two different membership options. The Gold Star membership costs $60 per year, while the Executive membership costs double.

Charging a $120 Executive membership to your credit cards when you could get the privilege of shopping at the warehouse club for half that amount may not seem like a good deal. But, in reality, a large number of people would be much better off with an Executive membership. Here's why.

How can you tell if you have the wrong kind of Costco membership?

While the Costco Gold Star membership may seem like the best option by default since it is just $60 compared to $120, there's one important benefit of the Executive membership that cannot be overlooked: The Executive membership offers you 2% cash back on qualifying Costco purchases. You're also able to earn a maximum of $1,000 in cash back over the course of the year when you are an Executive member.

If you spend enough at Costco over the course of the year, the extra $60 you're spending for the Executive membership could be paid for by the 2% cash back you get. And, not only that, but you could actually end up much better off even after spending the extra $60 since you continue earning rewards until you hit the $1,000 limit.

If you spend a total of $3,000 per year at Costco, you will get $60 in rewards for doing so (2% of $3,000). If you spend more, then you'll earn more than enough to cover your membership and can enjoy the effective 2% reduction in the cost of every single eligible item you buy.

While $3,000 might seem like a lot at first, it’s just $250 per month. Many people can easily spend that on groceries or household items at the warehouse club -- and thus cover their Executive membership costs.

Should you become a Costco Executive member?

Becoming a Costco Executive member makes sense if you spend enough at the warehouse store to cover the added cost of upgrading your membership. You can also take advantage of other valuable perks if you become an Executive Member, such as additional discounts on many Costco services.

However, you need to realize that you will receive your cash back rewards via mail when your annual renewal notice is sent to you. And you will need to redeem the rewards for Costco purchases. So unless you plan to continue shopping at Costco in subsequent years so you can use your rewards, an Executive membership may not be worth it.

You also don't want to feel forced into spending $250 or more at Costco per month when you otherwise wouldn't just to make your upgraded membership worthwhile.

So, before you upgrade your membership, do the math on how much you realistically would spend per month at the warehouse store anyway, and let this be your guide in determining if paying the extra $60 is worth the price to you.