Cash-back credit cards are like that sweet but mysterious crush who seems too good to be true: We don't fully understand them, but we hear they're full of rewards, sweet generosity, and untapped potential. And while finances aren't always the most exciting subject to bring up, we're also well aware of their importance. With only the essential information about the benefits, pitfalls, and recommendations from a credit card expert, we're making money management conversations a little less dry and a lot more digestible.
We spoke with Bethy Hardeman, chief consumer advocate over at Credit Karma, a free online service committed to giving people the tools to manage their finances responsibly and independently. She filled us in on the best practices for cash-back credit cards, and let's just say it's piqued our financial interests. And while we're on this topic, find out what the four best credit cards for travelers are (especially if you have any trips coming up). Scroll through to learn how you can maximize your spending, and then shop some seriously stylish wallets so your new plastic bestie has a covetable home.
Watch Out for Pitfalls in the Fine Print
Look out for the terms "interest rate" and "annual fee" when shopping around for your credit card. Hardeman explains that "many cash-back or rewards cards come with high interest rates and may even charge an annual fee." If you already have a card like this, don't freak out because there is a solution. You'll just need to be extra vigilant about paying your credit cards on time and in full every month. "Interest and late fees are never worth it, even if the card's cash-back or benefits are great," Hardeman reminds us.
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Make Sure You Don't Overspend
It's important to be self-aware about your spending habits to avoid any future credit issues—and all the other problems those issues beget in your professional and personal life. As we've previously mentioned, one of the biggest spending mistakes you can is not keeping an eye on your checking account. Hardeman affirms that the best way to make the most of your rewards is to watch your spending. "If you don't ordinarily spend much, don't start [just] for the cash-back results. This can end up hurting your credit." If you do have some debt, know your jargon. An important one is "credit utilization—the amount of debt on your credit cards divided by the total of all of your credit limits," which you can calculate yourself. This is a huge factor in your credit score. You'll know if you're on track if you can "keep your balances under 30%, although less is best." Besides, most cash-back reward programs require a good credit score anyway.
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Turn Your Spendings Into Savings
Now for the good news. Hardeman explains that "by putting your everyday spending on a cash-back or rewards card, you might even be able to save some money." Cha-ching. But this is most likely if you "remember that the best credit card should reward you for the spending and lifestyle you already have, not the lifestyle you wish you had," she warns. And, most importantly, keep in mind that not all spending will result in cash rewards, so you need to do some research. As a general rule of thumb, Hardeman notes that "many cash-back credit cards offer bonuses for everyday spending at supermarkets, gas stations, or restaurants, which can add up."
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Know Your Options Before Applying
Repeat after us: Don't say no, say know with a hard "K." A good cash-back credit card is valuable, but make sure you're well informed about your options. Here are Hardeman's expert opinions about three popular ones:
Chase Freedom: This card offers changing quarterly 5% cash-back bonus categories, as well as unlimited 1% cash back on all other purchases, with no annual fee. 5% cash-back categories this quarter on up to $1500 in combined purchases at department stores, wholesale clubs, and drug stores. The card also features a $150 sign-up bonus after you spend $500 in the first three months.
U.S. Bank Cash+ Visa Signature Card: You can pick two categories to receive 5% cash-back on your first $2000 in combined net purchases each quarter, 2% cash-back on purchases at gas stations, grocery stores or restaurants and 1% on everything else, with no annual fee. Popular 5% cash-back categories are clothing stores (including Gap, J.Crew, or The Limited), department stores (including Macy's, Sears, or Nordstrom) and electronic stores (including The Apple Store or Best Buy).
Citi Double Cash Card: This card is one of the most popular cash-back cards because it's so straightforward. You can earn cash back twice on every purchase, an unlimited 1% when you make your purchase, plus an additional 1% when you pay them back.
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If you'd like to learn more about your credit, compare credit card features, rewards, and approval odds for free, then head over to Credit Karma.