Personal Finance: Is ‘Cash Back’ Necessarily Worth It?

Maybe it is because I am watching more television these days due to the COVID surge, and feel like I am seeing more cash-back commercials, because I can hear Kevin Hart in my sleep yelling about Chase Freedom cash back credit cards — or because Samuel Jackson, who can be pretty scary, keeps telling me I need a Capital One cash back card — but I feel like we need to revisit cash back credit cards and shopping apps.

When it comes to cash back credit cards, there are 6 things to know and remember.

First, credit card companies can afford to pay you cash back rewards, even if you pay your credit card balance in full every month, because, aside from the profits that they make on the fees and interest they charge card holders who don’t do that, they receive merchant fees from every business where a purchase is made with their card. According to bigcommerce.com, these interchange fees are generally a flat fee and a percentage of sales, with an average rate in the U.S. of about 2%.

Second, if there is an annual fee, obviously the amount of that fee will reduce the overall value of any cash back or other rewards you ultimately receive.

Third, many studies show that people with cash back cards may spend more than they otherwise would or need to, because psychologically they are getting cash back, even if they pay their balance in full every month, so they can, in theory, afford it. We have noted this in the past, but the perfect example, if you really analyze it, is the American Express cash back commercial, featuring Tina Fey and Michael Che. I use it all time in my CARE Financial Literacy presentations in the schools.

They are having a meal together in what looks to be a diner. Aside from the facts that they are both millionaires (according to Google, $75 million for Tina, and $4 million for Michael), and that there is nothing wrong with occasionally doing something nice for a friend, she ends up buying him a $25 meal, with desert, that she really doesn’t need to buy him, because she is getting cash back. The message that the commercial is giving is about getting that cash back. My message to the students is, she spent $25 she didn’t have to spend, even though she can afford it, in order to get, maybe, 3% back in cash, which is 75 cents. I tell them, if your financial plan is going to be to spend $25 you don’t need to spend, in order to get 75 cents back, I probably can’t help you.

The bottom line is that spending everyday money that you don’t need to spend and outright impulse buying, because you are getting cash back, effectively reduce the actual value of those rewards or cash back.

Fourth, obviously, if you don’t pay off the balance on that cash back card every month, you may be paying significant late or over limit fees, as well as interest at very high rates, which make the cash back meaningless. Although, believe it or not, I have heard debtors in bankruptcy court say, I would carry that balance and pay that interest anyway, so the cash back actually means I am effectively paying less interest. Yes, everyone needs to spend a day there listening to what goes on! Then, you might agree with me that we have a National Epidemic of Financial Illiteracy.

Just like with any other borrowing, your credit status matters, and you should always shop around to get the best interest rate, in case you can’t pay the balance in full any given month.

Fifth, it is important to read all of the terms and conditions of the card. There may be terms like a maximum amount of cash back you can earn each quarter or annually, or the cash back per category of purchase can differ per quarter and also can be limited, and some purchases may not qualify for cash back at all.

Last, make sure that the redemption method works for you. For example, how often do you receive the cash back rewards? Is your cash back paid by a check or deposit to your bank account, by a reduction credit on your credit card statement, or by a gift card that you may or not use, especially if it is with a specific merchant?

When it comes to cash back on online purchases, it seems that I have also been seeing and hearing a lot more of those commercials, especially for Rakuten, an affiliate marketing company that allows you to earn cash back by shopping on its site.

Here, unlike with cash back credit cards, it is not about merchant fees and credit card fees and interest on unpaid balances, it is essentially about Rakuten sharing its commissions from, according to millennialmoney.com, over 2,500 retail sellers on the products you buy through its site. As a result, it is completely free to the consumer, with no fees or charges. You can earn cash back, paid out quarterly, in store also, through an app; and cash back varies depending on the retailer. You can also earn cash by referring someone new to them.

Sounds like a win-win, and it is — unless, again, you find yourself impulse buying or buying things that are not within your hopefully living-within-your-means, consumer-debt-free budget.

Finally, we have learned from the pandemic experience the importance of always having your affairs in order, especially if you have a partner and younger children. Take the time now to get all of the financial, insurance, home repair and improvement, and related files for everything that you always handle and are responsible for, organized and updated. Then, make sure that you also create a written roadmap of how anyone can understand and navigate through those files, and take care of those matters if you can’t.

John Ninfo is a retired bankruptcy judge and the founder of the National CARE Financial Literacy Program. Find his previous weekly columns at http://www.mpnnow.com/search?text=Ninfo.

This article originally appeared on MPNnow: PERSONAL FINANCE: Is 'cash back' necessarily worth it?

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