Avoid These 7 Cash Back Credit Card Traps

Card issuers often employ these tricks; don't be fooled by them.

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The allure of “free” money attracts many consumers to cash back credit cards. If used wisely, cash rewards can be a nice bonus every month to help pay bills or save some extra money. But understanding the terms and conditions that come with these types of cards can be daunting. To help you navigate through all of the details, we’ve put together the following list of 7 cash back traps to avoid.

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As you read through this list, keep in mind that the standard cash back reward for the vast majority of credit cards is 1 percent. Virtually all cards that offer more than 1 percent have some kind of limitation that you should understand before applying for and using the card.

1. Teaser Cash Back Percentages: Wouldn’t it be great to get 5 percent cash back on every purchase? While some cards offer 5 percent cash back, there is a catch. The 5 percent doesn’t apply to all purchases. In fact, for most of these cards, the top cash back rewards apply to only select categories that rotate throughout the year. And even in these categories, there is a limit to how much cash back you can earn.

2. Spending Caps: Some cash back cards limit the amount of monthly or yearly purchases that qualify for rewards. These spending caps are particularly common among cards that offer rewards ranging from 3 to 5 percent. So while you may get 5 percent back on restaurant purchases, for example, there is likely a spending cap on this offer of about $400. Gas reward credit cards that typically offer 2 percent to 3 percent cash back on gas purchases also cap spending to roughly $250 a month.

3. Spending Tiers: Some cards offer their top cash back rewards only after you’ve charged a certain amount to your card. Blue Cash from American Express, for example, has a top cash back rate of 1.25 percent on certain categories of purchases. But this top rate only kicks in after you’ve charged $6,500 to your card each year. This may be a good deal if you use your card a lot, but not such a great deal if you don’t.

4. Exclusions: Many cash back cards do not pay rewards when you shop with certain retailers. Perhaps the most common exclusion applies to discount warehouses such as Costco and Sam’s Club. If you are looking for cash back at these types of merchants, you need to make sure the card will pay cash back at these discount retailers. One example is the True Earnings card from Costco and American Express, which pays 1 percent cash back for purchases at Costco.

5. Cash Back Bonuses: Several cards offer an initial cash back bonus to new cardholders. These deals typically require you to charge a certain amount of money to the card over the first three to six month. And some of these offers can be very enticing. For example, some credit cards now offer up to $100 bonus cash back. The key is to recognize that these cash back bonuses are one-time events. While they are worth considering as you evaluate which card is best for you, don’t let the allure of a quick cash bonus keep you from evaluating the other terms of the card.

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6. Limitations on how you can use the cash: Many cash back cards give you a choice on how to use your rewards. These choices include receiving a check, applying the reward to your credit card statement, or receiving gift cards. But some cards limit how you can use the reward. The Fidelity Retirement Rewards American Express card, for example, pays 2 percent cash back on all purchases, but the rewards must be deposited into your Fidelity IRA account.

7. Don’t Overspend: The final trap is an important one to monitor. With cash back rewards, we can sometimes be tempted to spend money when we otherwise would not. While cash back rewards are great for purchases you’d make anyway, make sure you are not spending just for the sake of a cash reward at the end of the month. To help keep track of what you are spending, you might consider paying off your cash back card several times throughout the month. It’s easy to do online, and watching the money leave your checking account may help keep you from overspending.

DR is the founder of the popular personal finance blog, the Dough Roller, and author of 99 Painless Ways to Save Money.