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How to Make Money with Cash Back Credit Cards

Updated on October 13, 2014

Get cash back and keep it!

You’ve seen the offers - 1%, 2% and even 5% cash back on all of your purchases with your credit card. But is it worth it? Do the cards really hold an extra benefit over simply using your ATM card or even cash? Or are you just going to get hit with interest charges that erase any savings that you might have received?

The answer is yes, cash back credit cards can be worth it, but only if you understand how to use the card to your benefit. The secret to using credit cards that offer cash back on your purchases is to never carry a balance. This keeps you from paying interest on your charges. The only way the card will actually save you money is if you pay it off in full by the due date each month. Otherwise all of your savings is eaten up by interest charges that can be as high as 25%. The 1% cash back savings is eaten up in just a month or two, depending on the interest rate you are being charged.

Let’s look at an example:

Say you make a $1,000 purchase on your card, and the offer is 1% cash back. Your bonus amount is $10, and the item ends up costing you $990. If you pay the balance in full on your next statement, and within the grace period (typically about 20 days), you have actually received the savings of $10. However, if you let the balance sit and accumulate interest charges, your $10 disappears fairly quickly. If your card charges 12% annually, your monthly interest charge will be nearly $10. After sitting for 3 months without paying it off, you are now being charged around $1,020 for the item.

All of my numbers are approximates, and will vary greatly based on interest rates and cash back offers, but you begin to get the idea of why the offers work in favor of the credit card companies.  That isn’t to say that you as a consumer can’t benefit from the card - you just have to know how to use it properly!

Do you pay your balance in full?

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