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How to Get the Most Out of Cash Back Credit Cards

Experts predict even sweeter reward programs in 2018, but you must manage the debt strategically.

New cash back credit cards offer attractive incentives for online purchases

Credit card issuers are rolling out their latest and greatest reward credit cards for 2018 and some of these programs seem too good to pass up. For instance, Amazon Prime now offers a store credit card with 5% cask back. And recently featured five expanded cash back credit cards that will offer even better incentives than they have in the past.

Reward credit cards can provide more value for making purchases on credit, particularly cash back credit cards that are becoming more and more popular. Still, experts warn that rewards credit cards are only rewarding if you have a strategic plan to manage the debt.

“It’s easy to get pulled in by attractive reward programs, like a 5% cash back offer,” agrees Gary Herman, President of Consolidated Credit. “It almost seems too good to pass up. But keep in mind that even the best rewards can be quickly offset by high credit card interest charges. And you need to read the fine print on these offers to ensure you really are getting a good deal.”

Maximizing the benefit of cash back rewards

Cash back credit cards offer the most benefit when you use them interest free. This means that you want to maintain a net balance of zero on the account. In other words, you want to start and end every billing cycle with a zero balance.

This is how to use cash back credit cards interest-free:

  1. First, you must start each billing cycle with no balance.
  2. You make charges throughout the month, earning cash back on the purchases you make.
  3. Then, you pay the balance off in-full at the end of the billing cycle.

If you do this, no interest charges apply to the purchases you make. This is crucial, since cash back credit cards tend to have higher APR.

“Five percent cash back sounds like a lot, but if the credit card has an interest rate of 21% APR, the rewards can be quickly offset,” Herman explains. “Credit card interest charges can take up more than two thirds of every payment you make when they apply. So, it only takes two to three billing cycles to completely negate any rewards you earn.”

This makes it crucial to use cash back credit cards strategically, because it takes conscious plan to use the card correctly. Earning cash back without offsetting it through interest charges is really the best use of this kind of credit card.

Credit card grace periods give you additional flexibility

Some credit cards have a special feature known as a grace period. This is a window of time after the billing due date before interest charges apply. It’s usually about 2-3 weeks after the billing due date.

Cash back credit cards that have a grace period give you extra payment flexibility. You can make the minimum required payment or whatever payment you can afford, then pay off the rest before the grace period ends. This could allow you to spread out the burden of paying off your balance over two paycheck cycles, instead of just one.

Just be aware that most credit cards don’t include grace periods. Read the credit card offer and your credit card agreement carefully to see if one applies.

Watch out for the fine print in your credit card agreement

“You also want to read any terms of use carefully before you sign up for a credit card to look for potential credit traps,” Herman continues. “Creditors aren’t out to trick you, but some offers come with strict terms that limit their use.”

On the Amazon Prime card, for instance, there’s an additional feature above and beyond the 5% cash back. The card also offers promotional financial options for Prime orders of more than $149. You can finance larger purchases for 6, 12 or 24 months at zero interest. However, this financing option comes with deferred interest. Basically, if you don’t pay off the balance before the end of the financing period, they apply interest charges. That 26.99% APR doesn’t just apply to the balance you have left to pay. It applies to the full balance.

So, if you can’t pay off the balance within the allotted time, you end up paying interest charges on the whole thing.

Have you run into trouble with debt while taking advantage of reward credit cards? Talk to a certified credit counselor to find a solution.

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