credit & debt

Will a Cash-Back Card Make You Spend More?

Probably yes. And here are seven other reasons these cards might not be so rewarding.

Your mailbox probably will be flooded with offers for credit cards this month -- especially if you have good credit. Many of these offers will be promoting cash-back credit cards.

"Cash-back promotions on purchases have become increasingly popular as consumers are saving more and spending less," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. Used wisely, a cash-back credit card can be a good way to put money back in your pocket while spending on things you normally would buy, such as groceries or gas.

But if you don't read the fine print and pay off your balance each month, your cash-back card won't be that rewarding. "These cards typically have a slightly higher interest rate, and interest charges quickly outgrow any cash rewards," Hardekopf says. Plus, there's another major pitfall to these cards: There's a good chance you'll spend more and rack up more debt with a cash-back card.

The Federal Reserve Bank of Chicago looked at the spending habits of people before and after they were enrolled in a cash-back rewards program. The study found that spending and debt increased by $79 and $191 a month, respectively, with an average cash-back reward of $25. And 11% of cardholders who didn't use their cards during the three months prior to enrolling in the cash-back program spent at least $50 in the first month of the program.

Keep this in mind as you consider whether to sign up for a new cash-back card (or continue using the one you already have). Also be aware of these seven loopholes that Hardekopf says can limit your ability to get cash back:

Rotating categories. Several cash-back cards rotate the categories on which you can earn cash back every quarter. So you may earn 5% on grocery or travel purchases during three months of the year, and just 1% the rest of the year, Hardekopf says.

Enrollment periods. To get the bigger rebates on rotating cards, you must enroll at the beginning of every quarter. If you forget to enroll, you may only get the 1% rebate.

Rebate limits. Many cards have limits on the amount of cash rebate you can earn with special 5% rebate offers. For example, the Chase Freedom card caps the amount of cash you can earn each quarter at $75. The Citi Platinum Select card offers a maximum of $300 in rebates per year.

Tiers. Several cards have tiers or levels that you must spend before the 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, Hardekopf says.

Disappearing cash back. Your cash-back bonus will beforfeited with most issuers if your account is closed or if you fail to make the minimum payment due by the payment duedate for two consecutive billing periods.

Ineligible purchases. Issuers may limit what purchases apply for bonus rebates. For example, purchases at warehouse stores may not apply for the higher rebate.

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