Cash-Back Credit Cards May Not Be All Reward

NEW YORK ( -- Last month it was holiday cards clogging your mailbox. Don't be surprised if credit card offers are replacing them.

January is the busiest month for credit card applications. Issuers will flood consumers with offers, especially for cash-back cards. Credit card issuers want your business, and they are competing for every customer, even trying to lure customers away from each other. Good deals are available, but it is important to compare offers to find the lowest rate and best rewards for you.

Credit card mailings are up significantly from last year. U.S. consumers got some 1.2 billion offers for credit cards in the third quarter of 2010, compared to just 391 million in the third quarter of 2009, according to Mintel Comperemedia. Eight in 10 offers are for rewards cards promoting points, miles or cash rebates, up from six in 10 offers in 2008.

Cash-back promotions on purchases have become increasingly popular as consumers save more and spend less. Cash-back credit card offers accounted for 41% of all rewards offers in the third quarter of 2010, compared to 28% a year before. Issuers responded to a new frugality by promoting rewards that offer better returns on "everyday items," with 45% of offers mentioning the word "groceries" somewhere in the promotional copy last year, Mintel says, up from just 20% in 2008.

Credit card issuers know rewards are an effective way to attract cardholders or increase usage. While these can be a nice bonus for people who pay off their balance and take advantage of the rewards, credit card companies use reward offers to increase spending that may just result in more cardholder debt.

A new paper by the Chicago Federal Reserve reveals why cash-back cards are important to credit card issuers: Consumers spend more and accumulate more debt with them. The study used a 1% cash-back card and found that the average cardholder got $25 per month in cash-back rewards using it. Average spending increased by $68 per month, though, and average debt by more than $115 per month in the first three months after the program started. Cardholders also reduced payments by $38 within those first three months.

Issuers offer cash-back reward cards expecting an increase in spending. They also want consumers to pay with the card for all purchases instead of using cash, check, debit cards or other credit cards. They make money from the interchange fees as well as the finance charges that grow when cardholders carry debt.

Attractive cash-back credit cards
Cash-back cards, like all reward cards, are good for consumers if and only if you pay off the balance on time each month. These cards typically have a slightly higher interest rate, and interest charges quickly outgrow any cash rewards. With this in mind, here are some of the most attractive cash-back cards:

Chase Freedom $100 Cash Back ( JPM)
Consumers earn 5% cash back in quarterly bonus categories such as gas, home improvement and department stores (but must remember to sign up each quarter). Cardholders will also earn a 1% rebate for each $1 of net purchases. There are no spending tiers or earning caps, and cash rebates never expire. Cardholders will get a $100 cash back bonus after spending just $500 within the first three months of the account opening.

Discover More $100 Cash Back ( DFS)
Consumers earn 5% cash-back bonus in gas, restaurants, movies and travel up to the total purchase dollar amount specified in each program. They also get 1% unlimited cash-back bonus on purchases after total annual purchases exceed $3,000; purchases that are part of the first $3,000 earn 0.25%. There is no yearly limit on the amount of rebates that can be earned, and rebates do not expire. There is a $100 cash-back bonus if there is $500 in purchases in the first three months.

PenFed Visa Platinum ( V)
Earn 2% cash back on supermarket purchases; 5% from gas purchases paid at the pump; and 1% from all other purchases, with an annual $50,000 limit.

True Earnings From Costco and American Express ( COST)
The cash rebate varies by where you make the purchase: 1% on general purchases, 2% for travel-related purchases, 3% on restaurant purchases, 3% on gasoline purchases up to $3,000 and 1% thereafter. Cardholders can earn unlimited rebates, but there is a $25 statement credit with the first purchase.

Blue Cash from American Express ( AXP)
Earn unlimited cash back on eligible purchases. For the first $6,500, the rebate is 1% for everyday purchases and 0.5% for everything else. For eligible purchases over $6,500, the rebate percentage is 5% for the everyday and 1.25% for everything else.

Cash-Back loopholes
Consumers need to look at the terms and conditions of any credit card before they apply. There are a number of things cardholders need to be aware of when shopping for the best rewards card:
  • Rotating categories. On a number of cash-back cards, categories are rotated every quarter, which means you may earn 5% on those grocery or travel purchases only during three months of the year and just 1% the rest. Sometimes the categories won't apply to your buying habits and may not be a real bonus.
  • Enrollment periods. Bigger bonuses for rotating cards look good on the promotional page but there is a catch: You must enroll at the beginning of every quarter. If you forget to enroll, you may only get the 1% rebate.
  • Limits on the rebate. Many cards have limits on the amount of cash rebate you can earn with these special 5% rebate offers.
  • Tiers. A number of these cards have tiers or levels you must spend before the ongoing 1% rebate takes effect.
  • Interest rates. Reward cards typically have higher APRs and are a good option only for those who do not carry a balance. If you carry a balance, look for a card with a lower rate.
  • You can lose your cash-back bonus. If your account is closed for any reason or you fail to make the minimum payment due on time for two consecutive billing periods, your cash-back bonus will be forfeited with most issuers.
  • Sometimes your purchase may not qualify. In the fine print, issuers may limit what applies. For example, it is not uncommon that purchases at warehouse stores may not apply for the higher rebate. Read a card's terms and conditions to learn what purchases count.

-- Reported by Bill Hardekopf of
Bill Hardekopf is chief executive of, which compares and rates more than 1,000 credit cards. He is the co-author of "The Credit Card Guidebook."