10 Cash Back Credit Card Traps You Need to Know About

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Last updated on July 22, 2019 Comments: 14

Reward cards can offer us cash bonuses and free travel. They can also mire us in debt. To avoid the pitfalls, here are some cash back credit card traps to avoid.

For my own finances, I’ve been a fan of credit cards with cash back programs. Some financial experts advise avoiding credit cards completely, even those cards that offer rewards like cash back. I’ve never been a fan of this approach — again, for my own finances — because I see credit cards as just another tool for personal finance. In and of themselves, they’re neither good nor bad. You can use them to improve your credit score and finances. Or you can make bad decisions and ruin your finances with them.

For many people, credit cards do lead to trouble. But if you can gradually learn to use them responsibly, they can be a huge asset in your personal finances. What does real responsible credit card use look like? It means you pay your balance in full every month, unless you have pre-planned a large purchase on a 0% introductory APR card. It means you never pay interest, and that you use credit cards only to buy what you can afford.

If you can stick to these basic rules, cash back credit card programs are a great way to earn some money back for spending what you would have spent anyway. However, these programs are rife with traps from the credit card companies. Let’s be honest. Credit card companies don’t want you to come out on top with cash back programs. That means they’re paying you out of their own earnings. But if you know the traps ahead of time, you can use cash back credit cards well.

Here are the top ten cash back credit card traps to avoid whenever possible.

1. Credit card users spend more

Study after study shows that swiping a plastic card rather than handing over cash can cause you to spend more money. Parting with actual cash is psychologically more difficult. Add that to the fact that credit cards can encourage extra spending just to earn bonus points, and you can get into a real mess.

You’re less likely to hesitate to spend money, even money you don’t have when you use a credit card. And even if you can pay off the balance each month, you may still be overspending. A little bit extra here and there can really add up over time.

To avoid this, track your budget closely. Consider using a tool like YNAB or Mint that can sync up with your credit cards. Then you can look at your credit card spending as part of your whole budget. You can even receive alerts when you’re about to overspend in an area of your budget. This can help you keep your spending in check, even while you get the benefits of cash back cards.

2. Late fees and interest negate any cash back benefits

Carrying debt from month to month automatically negates your cash back benefits. You may get 5% cash back on some spending if you’re lucky. But if you’re paying 15% – 25% APR, you’re not seeing any benefits.

Let’s do the math here. Say you spend $1,000 in a 2% cash back category one month. You get $20 back. Not bad. But say an emergency comes up and you can’t pay the balance in full, so you carry it for just two months. How much will you pay in interest?

Well, if your APR is 24.99%, which is not unusual for average-credit consumers with cash back cards, you’ll pay around $32 in interest, according to this calculator, even if you pay off the balance within two months. And then if you add any hefty late fees into that mix, you can forget about ever seeing cash-back benefits.

Your average rewards credit card will have a higher interest rate. It’s the credit card companies’ way of getting you, even if you only carry a balance for a short period of time. And if you wind up making minimum payments on the account, you’ll pay much more in interest than you get in cash back benefits.

Emergencies happen, of course. That’s why it’s best not to use credit cards at all until you have a well-funded emergency plan. Then you can take advantage of credit card benefits even in the middle of financial turmoil.

3. Rotating categories and opt-in requirements

If you’re not planning to stay on top of your credit card’s rotating categories and opt-in requirements, choose a basic cash back card. Sure, the benefits may not look as tempting. But if you forget to opt in for that three-month 5% cash-back category, you’ll never see those higher-level benefits, anyway.

Those who plan their spending ahead can often get the best rewards by using several credit cards, by carefully planning which one to use when. That way you can get the best possible cash back on every part of your budget. But you have to pay attention for this approach, or you could miss out on higher cash-back benefits. If the credit card company requires you to opt in by a certain date for a rotating category, you could miss out on cash back benefits altogether if you miss that date!

Again, there are plenty of cash-back credit cards with lower rewards that are even across the board. These are a better bet if you don’t want to think too much about opting in or which card to use when.

4. Incorrectly categorized purchases

Unfortunately, credit card transactions are automatically categorized. And if your transaction doesn’t fit into the card issuer’s category, it may not qualify for the higher cash-back percentage you should have earned.

This is often apparent with gas and grocery purchases. For the most part, large chain gas stations and grocery stores will be categorized correctly. But smaller local stations and stores may not. This means if you’re shopping around for the best gas and grocery prices, you may forego your higher cash-back percentage.

The best way to try to avoid this issue is to do your research. Look into which stations or stores the credit card issuer counts in each category. Then fill up and shop at those locations, especially if you’re in a cash-back bonus time period.

5. Cash back isn’t always cash back

This is becoming less common. But some credit card companies do have misleading advertising. In some cases, for instance, you may need to spend “cash back” at a company’s gift card store. This can make redeeming your cash back frustrating and even expensive.

These days, more credit cards are offering straight cash back. But this is something to be aware of when shopping around. Look for cards that offer cash back in the form of a statement credit or PayPal transfer. Also, be sure to check the issuer’s rules on when cash back is distributed and if it expires.

6. Earning maximums and thresholds

Be sure you check a credit card issuer’s rules on maximums and thresholds. The most common issue here is a threshold for high cash-back categories. For instance, with the Discover It cards, you get 5% in categories that rotate every quarter. But you can only earn that amount on a certain threshold in spending, usually around $1,000 or $1,500.

And the American Express Everyday cards offer higher benefits on gas and grocery spending, but there’s an annual cap.

These higher cash-back categories can still be hugely beneficial. But you just need to make sure you understand the credit card issuer’s rules before you decide to get a particular credit card.

7. Changing terms

Thanks to the Credit CARD Act of 2009, issuers have less flexibility to change your credit card terms without much notice. Issuers do have options if they want to move customers from a great cash back program to a less impressive program. They’re most likely to discontinue one card type and replace it with another.

The benefits spenders receive today can change at any time. Credit card issuers react quickly to market forces. When one issuer offers a higher benefit, other issuers often respond within a week to remain competitive. The same reaction can happen on the opposite direction.

Luckily, most credit card issuers communicate well via email these days. So be sure to open all those emails and notices from your credit card company so you can see exactly what’s changing and when.

8. Some retailers are excluded

We touched on this above. For instance, smaller grocery stores and gas stations may have incorrectly categorized purchases on your statement. This can mean you don’t earn the cash back you were supposed to get.

But this can also be a big problem with larger chain stores, too. This is especially likely to be the case when your card offers a higher cash-back percentage at “supermarkets.” Different issuers will have different definitions of a supermarket. For instance, Costco may not qualify because it’s a warehouse store. And Target and Walmart may not qualify because they aren’t purely supermarkets or grocery stores.

Be sure you pay attention to your credit card company’s rules before you bank on cash back at the places you typically shop.

9. Misleading conversion rates

This is most likely to be a problem when you’re dealing with point-based rewards systems. Sometimes rewards are earned at the rate of one point per dollar spent. But they aren’t worth a penny each. It often depends on how you redeem those points.

These cash-back credit card programs apply the points as a credit on your statement. If you want to receive your cash back in the form of gift cards, you might have to pay more points per gift card dollar than you’d think.

Sometimes points-based programs can be more valuable, but you definitely have to know how to use them. For instance, some card issuers have excellent travel programs that make points worth more than a penny a piece. But others will use these complicated systems to make your points worth less so they don’t have to pay out as much.

10. Spend-inducing introductory bonuses

These days, many cash back credit cards offer impressive introductory bonuses. If you spend $3,000 in the first sixty days of card ownership, for instance, you might get $200 in cash back bonuses. That’s a valuable reward that’s worth looking into.

The problem is if you’re trying to come up with ways to spend money to get to that bonus threshold. Oftentimes, hitting the mark is easy for families with heavy expenditures on everyday items like food and gas. You don’t have to try very hard to spend $3,000 in two months. And since you were going to spend it anyway, you can pay it all off right away.

But if you’re a single person or live on a very low budget, you might spend more than you otherwise would have to get that sign-up bonus. And that generally won’t pay off, especially if you wind up carrying a balance.

These cash back credit card traps don’t mean you should avoid these cards altogether. They can be a valuable resource for earning money on spending you already do everyday. You just need to know what to look out for so that you can avoid traps like these when you’re using your favorite cash-back cards.

Article comments

Anonymous says:

Thanks for pointing out these facts. I’m involved with many different credit cards and am boggled by all the different ways the banks handle reward cards. Affiliate marketers seem to rarely mention the downsides to credit card applications. For me, I would just like to know the redemption tiers. Sometimes the rewards sound great, but if you have to spend $25,000 to attain a 1:1 ratio, you may encouraged to redeem at a less favorable rate.

Anonymous says:

Don’t be a coward…print the truth!!!.

Anonymous says:

Chase Bank has sold your credit card information to magazine companies. They admitted it to me and even were gracious enough pay me back for 60 days of magazines that I never ordered…now they only owe me for six more months and hundreds of magazines. By the way they sold all my debit card numbers and the “secret” number on the back of my card to list for magazine and puplishing companies. Your money is not safe…just pull up the Chase Bank takes your money without your signature stealing your information on line..on any provider. You will find hundreds of complaints…
I am 75 years old and all I have is my Social Security and Medicare left (with no raise since it was issued to me) I have cancer, lost my house and live with my daughter.

Anonymous says:

Another one i’ve seen with gas stations is that purchases inside vs at the pump get credited differently. If i pay for my gas inside (because i’m also getting an overpriced candy bar) my whole purchase ends up not qualifying as gas. If i pay at the pump at the same station it qualifies.

Anonymous says:

I have had the same 2 cards for 7 years. i use one every 6 months to keep it active and the other one for continued use. Because I have kept them and paid them off every month, I am considered a great customer. The one I use often has just sent me a list of services i qualify for at no charge. I also use my points for gc’s because I can use 40 points to get a 50.00 gc. It works for me. A friend uses her card for the cash back and transfers it into an account. Whatever works for the individual is a ‘good thing’.

Anonymous says:

And they check your credit score when you sign up.

Anonymous says:

Which is why I stay with the cards I have.

Anonymous says:

The best cash back card is Target! You receive it on all purchases immediately. I personally like airline credit cards because of the frequent flier miles. I too use credit cards as a tool to manage my money. and as a convenience.

Anonymous says:

It’s probably not worth one’s time to try to optimize cash back rewards. This is true regardless of your income – either you have high income, and could do more profitable things with your time, or you have low income, and you don’t typically spend enough to get a large amount of rewards. Even if you’re retired (lots of free time), keep in mind that your ability to do math and make decisions reportedly peaks at age 53, and declines from there.

That is my justification for this strategy: Pick one decent cash-back Visa or Mastercard. Try to get at least 1%. Stick with pure cash back. All else being equal, pick a card that will give you a little extra if you happen to meet some rule, threshold, or special spending category during your normal activities, but don’t go out of your way for it. Keep it simple and you get 80% of the benefit of cash back cards for 20% of the effort.

Anonymous says:

Some of us over 53 get better with age.

Anonymous says:

Since I have total confidence in my financial discipline, I’m one of the few that use cash back credit cards for the majority of my purchases.

Anonymous says:

I avoid cash back credit cards. It’s so easy to spend freely using a credit card then you get shocked when you see the statement.

Anonymous says:

I have been caught in some of these traps. The idea that it is easier to spend on a card than with cash is SO true. We always think things will be better next month……

Anonymous says:

If you dont know what you are getting into you should not be getting the credit card, know the fine print. Thanks for the info, and for all the information you provide on your blog.