Banks Pushing Cash-Back Credit Cards

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The following post is from Bill Hardekopf at partner site Lowcards.com

January is the busiest month for new credit card applications. Issuers will flood consumers with numerous offers promoting new credit cards, especially cash-back cards.

“Don’t be surprised if credit card offers replace Christmas cards in your mail box this month,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Credit card issuers want your business and they are competing for every customer, even trying to lure customers away from each other. Good deals are available, but it is important to compare offers to find the lowest rate and best rewards for you.”

Credit card mailings are up significantly from last year. U.S. consumers received approximately 1.2 billion offers for new credit cards in the third quarter of 2010, compared to just 391 million in the third quarter of 2009, according to Mintel Comperemedia. Consumers with good or excellent credit scores are still receiving the most attention. Much of this is due to credit card offers promoting reward programs. Eight in ten offers are for rewards cards promoting points, miles or cash rebates, up from six in ten offers in 2008.

Cash-back promotions on purchases have become increasingly popular as consumers are saving more and spending less. Cash-back credit card offers accounted for 41% of all rewards offers in the third quarter of 2010, compared to 28% a year ago. Issuers responded to this new frugality by promoting rewards that offer better returns on “everyday items.” Forty-five percent of offers mentioned the word “groceries” somewhere in the promotional copy in 2010, up from just 20 percent in 2008 (Mintel).

Credit card issuers know that rewards are an effective way to attract cardholders or to increase usage. While these can be a nice bonus for people who pay off their balance and take advantage of the rewards, credit card companies use reward offers to increase card spending that may result in cardholder’s debt in the future.

A new paper by the Chicago Federal Reserve reveals why cash-back cards are important to credit card issuers. The paper found that consumers spend more and accumulate more debt with a cash rebate card. The study used a 1% cash-back card and found that the average cardholder received $25 per month in cash-back rewards using this card. However, the average spending increased by $68 per month and average debt increased by over $115 per month in the first three months after the cash-back reward program started. Cardholders also reduced payments by $38 within those first three months.

Issuers offer cash-back reward cards expecting an increase in spending. They also want consumers to pay with the card for all purchases instead of using cash, check, debit cards or other credit cards. Issuers make money from the interchange fees as well as the finance charges that grow when cardholders carry debt.

Attractive Cash-Back Credit Cards

Cash-back cards, like all reward cards, are good for consumers if and only if you pay off the balance on time each month. These cards typically have a slightly higher interest rate, and interest charges quickly outgrow any cash rewards. Here are some of the most attractive cash-back cards:

Chase Freedom $100 Cash Back
Consumers earn 5% cash back in quarterly bonus categories such as gas, home improvement and department stores (remember to sign up each quarter). Cardholders will also earn a 1% rebate for each $1 of net purchases. There are no spending tiers or earning caps, and cash rebates never expire. Cardholders will receive a $100 cash back bonus after spending just $500 within the first three months of the account opening.

Discover More $100 Cash Back
Consumers earn 5% cash back bonus in gas, restaurants, movies and travel–up to the total purchase dollar amount specified in each program. Earn 1% unlimited cash back bonus on purchases after your total annual purchases exceed $3000; purchases that are part of your first $3000 earn 0.25%. No yearly limit on the amount of rebates that can be earned and rebates do not expire. $100 Cash-back bonus after you make $500 in purchases within your first three months.

PenFed Visa Platinum
Earn 2% cash back on supermarket purchases. Earn 5% cash back from gas purchases paid at the pump. Earn 1% cash back from all other purchases. $50,000 limit each year.

True Earnings From Costco and American Express
Cash rebate varies by where you make the purchase: 1% on general purchases, 2% for travel-related purchases, 3% on restaurant purchases, 3% on gasoline purchases up to $3,000, 1% thereafter. Earn unlimited rebates. $25 statement credit with first purchase.

Blue Cash from American Express
Earn unlimited cash back on eligible purchases. For the first $6,500 of eligible purchases, the rebate is 1% for everyday purchases and 0.5% for all other eligible purchases. For eligible purchases over $6,500, the rebate percentage is 5% for everyday purchases and 1.25% for all other eligible purchases.

Cash-Back Loopholes

Consumers need to look at the terms and conditions of any credit card before they apply. There are a number of things that cardholders need to be aware of when shopping for the best rewards card:

  • Rotating categories. On a number of cash-back cards, categories are rotated every quarter, which means you may only earn 5% on those grocery or travel purchases during three months of the year, and just 1% the rest of the year. Sometimes the categories won’t apply to your purchasing habits and may not be a real bonus for you.
  • Enrollment periods. Bigger bonuses for rotating cards look good on the promotional page but there is a catch–you must enroll at the beginning of every quarter. If you forget to enroll, you may only get the 1% rebate.
  • Limits on the rebate. Many cards have limits on the amount of cash rebate you can earn with these special 5% rebate offers. The Chase Freedom card has a maximum $75 cash back you can earn each quarter. With the Discover More card, earn up to 5% on up to $800 in purchases during January through March in the selected categories. The Citi Platinum Select card offers a maximum of $300 in rebates per year. The American Express Blue Cash has no limit on the amount of rebate you can earn.
  • Tiers. A number of these cards have tiers or levels that you must spend before the ongoing 1% rebate takes effect.
  • Interest rates. Reward cards typically have higher APRs and are only a good option for those who do not carry a balance. If you carry a balance, look for a card with a lower rate.
  • You can lose your cash-back bonus. If your account is closed for any reason or if you fail to make the minimum payment due by the payment due date for two consecutive billing periods, your cash-back bonus will be forfeited with most issuers.
  • Sometimes your purchase may not qualify. In the fine print, issuers may limit what purchases apply. For example, it is not uncommon that purchases at warehouse stores may not apply for the higher rebate. Read the card’s terms and conditions to learn what purchases count toward the increased rebate.

(Editor’s Note: Money Talks offers a credit card search page designed to help you find a better credit card, and so does LowCards.com. Check both sites and you’ll find the best deal for you!)

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