One of the biggest questions we get around here is how do you even make a cash back credit card worth it? No one is particularly keen on running up their debt and/or buying things they don’t need to make a few bucks in the process, so how do you make it work? What do you actually have to spend to make a cash back credit card worthwhile? Sorry to say, but the answer is not all that clear or simple. For one, not all cash back credit cards are created equal. Some offer you 5% cash back on certain purchases up to so much, others off 3% or 2% or 6%. Some offer 1% cash back on everything after a certain spending limit has been reached.
What I’m going to do is give you a broad example of what you might have to spend cash back wise on a few different scenarios so you can see precisely how much you have to spend to make a cash back credit card worthwhile in your life. I’ll also tell you a few tips that make it easier on so many people to spend money, earn cash back and not actually go into debt in the process.
For the sake of argument, I’m going to use the Chase Freedom cards as an example. One is unlimited and offers you 1.5% cash back on every purchase no matter what, all the time, with no spending limits. The other is the regular freedom card that offers higher cash back with limits.
Let’s say that you have a Chase Freedom Unlimited card and you want to see how much money you need to spend to make it worthwhile. We’re going to say you earn $100,000 per year and you spend about $65,000 per your expenses such as gas, groceries, travel, fun and your monthly bills.
Tip Number 1 – use your credit card to pay your monthly expenses if you can. Instead of using your bank account or your debit card to pay for your mortgage, insurance, car payment, taxes or whatever, use your card. Then take all that cash you would have used otherwise to pay those things and write one big check at the end of the month to the credit card company to pay it off. It’s a situation in which you’re earning cash back on things you have to pay anyway, and you’re not running up your debt to do it.
This card does not have an annual fee, so it’s easy to make it worthwhile. Spend anything on it and you can call it worthwhile because you’re not paying a fee every year to keep this card.
Tip Number 2 – pay off your card in full every single month no matter what. Your card is not useful as a cash back card if you are paying interest. It washes out the cash back you’re earning.
Now, you can spend anything to make this card worthwhile. Even if you only put $5,000 per year on the card, you’re earning $75. That’s more than the nothing you were earning before. Now, we gave you a budget earlier – you spend $65,000 per year of your annual income on your card. When you do that math, you have earned an impressive $975 per year in cash back. That’s a pretty nice little Christmas bonus, right?
How about if you get a cash back credit card with rotating categories? The Chase Freedom offers 5% cash back on purchases in certain stores and locations every quarter. Let’s say that those include gas and groceries and entertainment throughout the year (they will change every quarter, and it’s entirely up to you to keep track). The 5% cash back is only good for the first $1,500 you spend in those places each quarter. That’s pretty easy to do throughout the course of three months, so let’s say you max those out each quarter. That’s 5% cash back on $6,000 worth of purchases every single year.
However, that’s $300 alone in cash back throughout the year. Now you’re other $59,000 in spending money is 1% cash back for a grand total of $590 cash back. Total, you’re earning $890. In this situation, it’s not worth it to use this card over the other card. However, some other cards offer cash back at a high percent on bigger limits each month or year – so you have a little potential to earn more.
Even if you don’t spend much at all, say $20,000 per year on your card, you’re earning a couple hundred dollars. All you have to do to determine whether or not your cash back credit card is worth it and how much you have to spend to make it worth it is to go over your spending habits, see how you can spend money each month and pay it off to keep your card balance at 0 and then make sure you’re not paying an annual fee. If you are paying an annual fee, just see how much cash back you have to earn to pay for the fee and then how much you have to earn to profit from the card.
Tip Number 3 – Figure out how much you spend each month in certain places and how much you spend all year. Take a few cash back cards that interest you and see how each one stacks up in terms of cash back earnings to see if you’re getting the most profitable card.
Everyone can earn money with a cash back credit card if you simply know how to do the math and figure out what is right for you in terms of which cards are most beneficial. Good luck and happy spending!
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