Cash-back credit cards can be easy to overlook. You make a purchase and earn, on average, around 1.5% back. To many, this may seem like an inconsequential amount. When you think getting that kind of discount on your morning latte, it seems like you’re getting pennies on the dollar.
However, this kind of mindset can end up costing you dearly. Cash-back credit cards can be more effective at putting money in your pocket than most people give them credit for. Here are three ways to think about these cards and what they can do for your wallet.
Your Spending Adds Up, and So Do The Rewards
One way to realize the true value of cash back rewards is to think more about shift your perspective on just how much you spend. Don’t think about getting cash back on your daily grocery shopping or gas at the pump. Try and think bigger. Instead of daily or weekly purchases, think about how much you spend within a year.
Buying just one small cup of coffee per workday from Starbucks can cost you $481 annually. That figure alone may shock some people, though it’s just one small piece of the pie. Based on data from the Bureau of Labor Statistics, the average household spends $17,160 each year on expenses that could be charged to a credit card. Assuming a cardholder earns a modest 1.5% cash back on these purchases, they will get an extra $257 back in their pocket each year. This isn’t even counting any bonuses that can throw an extra $100 or $200 towards that figure.
It’s easy to fall into the trap of only considering small everyday prices when evaluating cash back cards. It’s a direct result of how we interact with our money. You know what your bill was at checkout, or maybe even what your monthly credit card bill was last month. When we judge cash-back cards in this light, it can mask their true value.
Passing Up On Cash Back Rewards Has An Opportunity Cost
Assume for a moment that you decide the $257 in the above-example isn’t enticing enough. Even if that’s the case, you need to consider the fact that not only are you giving up that money, but also any potential opportunities that come with it.
For example, you could be putting this cash back towards your investment account. If every year you get a return of around 7%, while continually depositing $257 towards the account, in just five years you could have earned $1,478 from your rewards alone.
Cash back rewards can also be a way for you to invest in yourself. You can use the extra cash to pay for classes or training. The money can be used to pay for online programming classes to help your career or something leisurely to keep your sanity.
Bonuses Can Translate to A Discount of 30% Or More
Perhaps the most attractive perk on cash back credit cards, as is the case with most rewards credit cards, are their welcome bonuses. Top-of-the-line cards give users as much as $150 or $200 back when they meet some spending requirements within the first few months of account opening. If you have a big purchase coming up, opening up a credit card and hitting that bonus can be the equivalent of receiving a 30% discount.
The only thing to keep in mind is that bonuses are typically a one-time thing. Credit cards can have a negative effect on your credit score if used irresponsibly. Signing up for cards just for the bonus is generally not a good idea. Make sure you fully understand everything that goes into them before you apply.
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