Cashback credit cards are one of the most popular tools for earning rewards on everyday spending. On the surface, they seem like a no-brainer: swipe your card, pay your bill, and get a percentage of your money back. Who wouldn’t want to earn cashback for doing what they were already going to do?
But while cashback cards can offer great value, there’s more to the story than meets the eye. Behind the flashy advertisements and enticing offers, there are hidden truths that banks don’t always tell you. These can impact how much cashback you truly earn—and how much you might be giving back to the bank without even realizing it.
In this article, we’ll reveal the hidden truths about cashback credit cards that you need to know to truly maximize your rewards and avoid the traps banks may set.
- 1. The Real Cost of Interest and Fees Can Erase Your Cashback
Banks often promote cashback cards as a way to “earn while you spend.” But there’s a catch: if you’re not paying off your balance in full each month, the interest charges can quickly outweigh the rewards you’re earning.
Here’s the Hidden Truth: Most cashback cards come with interest rates (APRs) that range between 15% and 25%. If you carry a balance from month to month, the interest you’ll be paying can far exceed the cashback you’ve earned. For example, let’s say you earn 2% cashback on purchases but carry a balance with an APR of 20%. Over time, the interest costs could wipe out any rewards, leaving you losing more money than you’ve earned.
Additionally, some cashback cards come with fees—such as annual fees or foreign transaction fees—that can chip away at your earnings.
How to Avoid This Trap:
- Always Pay Your Balance in Full: To truly benefit from cashback rewards, make sure you’re paying off your balance in full each month to avoid interest charges.
- Look for No-Fee Cards: If possible, choose a card with no annual fees or foreign transaction fees. There are plenty of cashback cards that don’t charge fees, so there’s no reason to settle for one that does.
- 2. Cashback Isn’t Always as Simple as It Seems
Not all cashback is created equal. While some cards offer straightforward cashback (like 1.5% on all purchases), many come with complicated reward structures that can make it difficult to maximize your earnings.
The Hidden Truth: Many cashback cards offer tiered or rotating categories, where certain purchases earn higher rates of cashback (like 5% on groceries or 3% on dining), while other purchases may only earn 1%. However, these higher rewards often come with limitations. For example:
- Spending Caps: Some cards limit the amount you can earn at the higher cashback rate. You might earn 5% on groceries, but only up to $1,500 per quarter. After that, you’ll only earn 1% on the remaining grocery purchases.
- Activation Requirements: Some cards require you to “activate” the bonus categories each quarter. If you forget to activate, you won’t earn the higher cashback rate.
Additionally, cashback earned in the form of points or rewards may not always be as valuable as they seem. Some cards require you to redeem rewards through their portal, limiting your flexibility.
How to Avoid This Trap:
- Know Your Spending Habits: Choose a card that aligns with where you spend the most. If you spend a lot on groceries, choose a card that offers high cashback in that category, but be mindful of any caps.
- Set Reminders: If your card requires activation of rotating categories, set calendar reminders to ensure you don’t miss out on extra cashback.
- Look for Unlimited Cashback: If you don’t want to deal with caps or categories, look for cards that offer unlimited cashback on all purchases, such as the Citi® Double Cash Card, which offers 2% cashback on everything (1% when you buy and 1% when you pay).
- 3. Sign-Up Bonuses Can Be Misleading
Many cashback credit cards entice new customers with attractive sign-up bonuses, like $200 after spending $500 in the first three months. These bonuses can be a great way to earn a quick reward, but banks are betting on the fact that not all cardholders will meet the requirements—or that they’ll stick around long after the bonus has been earned.
The Hidden Truth: While sign-up bonuses can be valuable, the spending requirements may push some consumers to spend more than they normally would, just to earn the reward. This can lead to unnecessary purchases and possibly carrying a balance if you’re unable to pay off the extra charges in full.
Additionally, some sign-up bonuses have fine print that customers overlook. For example:
- Limited Time Frames: You may only have a certain number of months to meet the spending requirement.
- Exclusions: Some purchases may not count toward the bonus, such as balance transfers, cash advances, or payments made through third-party services like PayPal.
How to Avoid This Trap:
- Only Spend What You Normally Would: Don’t be tempted to overspend just to meet the requirements for a sign-up bonus. If the spending requirement doesn’t align with your regular budget, it may not be worth it.
- Read the Fine Print: Make sure you understand exactly what qualifies for the bonus and how long you have to meet the spending requirement.
- 4. Rewards Redemption Can Be Tricky
Even after you’ve earned cashback rewards, redeeming them isn’t always as simple as it should be. Some credit cards have restrictions on how or when you can redeem your rewards, which can make it difficult to access the cashback you’ve earned.
The Hidden Truth: While some cashback cards allow you to redeem rewards at any time for statement credits or direct deposits, others have limitations. For example:
- Minimum Redemption Amounts: Some cards require you to accumulate a certain amount of cashback—such as $25 or $50—before you can redeem it. This can be frustrating if you’re earning rewards slowly.
- Limited Redemption Options: Some cards only allow you to redeem cashback for gift cards, travel, or specific purchases, rather than for cash.
How to Avoid This Trap:
- Choose a Card with Flexible Redemption Options: Look for cashback cards that allow you to redeem rewards at any time and for any amount. Cards like the Capital One Quicksilver® or Citi Double Cash® offer flexible redemption options without restrictions.
- 5. Banks Profit from Cashback Cards in Ways You Don’t See
While cashback cards seem like a great deal for consumers, banks are still making a profit—and they’re counting on a few key factors to make these cards lucrative.
The Hidden Truth: Banks make money from cashback cards in several ways, including:
- Merchant Fees: Every time you use your credit card, the merchant pays a fee to the credit card company (typically 1% to 3% of the purchase). The bank then shares some of that revenue with you in the form of cashback, but they keep the rest as profit.
- Interest and Fees: As mentioned earlier, if you carry a balance or incur fees, the interest payments can more than make up for the cashback rewards you’ve earned.
- Increased Spending: Studies show that people tend to spend more when using credit cards compared to cash. Banks know that offering cashback rewards encourages consumers to spend more, ultimately increasing their profits from merchant fees and interest charges.
How to Avoid This Trap:
- Be Mindful of Your Spending: Don’t let the promise of cashback rewards tempt you into overspending. Stick to your budget and treat your credit card like cash—only spend what you can afford to pay off in full each month.
- Don’t Carry a Balance: Avoid interest charges by paying off your balance in full every month. This way, you’ll keep 100% of the cashback you earn, without giving it back to the bank in the form of interest.
- Conclusion
Cashback credit cards can be a valuable tool for savvy consumers, but there are hidden truths that can reduce the benefits if you’re not careful. From high interest rates to complicated reward structures and redemption limits, banks have designed these cards to work in their favor. To truly maximize your cashback, focus on using your card responsibly—paying off your balance in full each month, choosing the right card for your spending habits, and being aware of the fine print. By doing so, you’ll enjoy the benefits of cashback without falling into the traps that banks don’t want you to know about.