Find out how cash back credit cards work and how you can get the maximum benefit from your cash back credit card.
You have the potential to earn millions of rupiah in cash rewards with the right cash back credit card in your wallet. To pick the right cash back credit card, carefully compare cards and their rewards structure and choose the one that will benefit you the most based on your spending habits. This guide will tell you everything you need to know about how cash back credit cards work, how to choose the right cash back credit card, what to watch out for, what you need to do to qualify for a cash back credit card, and how to maximise your cash benefits.
You may already be familiar with rewards credit cards – a type of credit card that pays a benefit, like points or miles, on purchases you make with the credit card. Cash back credit cards are a type of rewards credit card that pays cash rewards on purchases. Cash is the most versatile reward you can earn because you can spend it on anything.
With a cash back credit card, cash is rewarded as a percentage of each purchase made. If your cash back credit card paid 1% cash back on purchases, for example, you would earn IDR10,000 for every IDR1,000,000 in credit card purchases you make. Then, once you accumulate a certain level of cash rewards, you can redeem your rewards for a deposit into your bank account, a statement credit, gift cards, or a number of other options depending on what your credit card issuer offers.
Some cash back credit cards require you to accumulate a set level of rewards before you can redeem rewards, while others let you redeem your rewards as you earn them, in any amount. Rewards may be sent to you automatically, or you may have to make a request to redeem your rewards.
Most cash back credit card issuers offer a shopping portal where you can use your rewards for online purchases, including gift cards. Often, your rewards are worth more when you use your credit card issuer’s shopping portal. For example, you may be able to make a IDR250,000 purchase using just IDR200,000 in cash rewards.
Cash back rewards programs are set up in two basic ways: as simple percentage rewards, or as tiered rewards.
With simple percentage rewards, the credit card pays a flat percentage as a reward on all purchases. This kind of reward program is easy to understand and earning rewards is almost effortless.
Example: Credit Card A pays 1.5% on all credit card purchases. For every IDR1,000,000 in purchases you make, you earn IDR15,000.
A tiered rewards program pays different percentages of rewards on different categories of purchases (so petrol might earn more than general shopping) . There may be a cap on the amount of rewards you can earn in the highest earning category. This type of rewards program will require a little more calculation and strategy in using your credit card if you want to earn the maximum amount of rewards.
Example: Credit Card B pays 3% on groceries (for up to IDR60,000,000 in grocery purchases each year), 2% on petrol purchases (from standalone petrol stations), and 1% on everything else.
For every IDR1,000,000 in grocery purchases you make, you earn IDR30,000; for every IDR1,000,000 in petrol purchases you make, you earn IDR20,000, and you earn IDR10,000 for every IDR1,000,000 you spend on everything else.
Say you spent a total of IDR3,000,000 split evenly among groceries, petrol, and other purchases. With Credit Card A, you would earn IDR45,000 in cash rewards. With Credit Card B, you would earn IDR60,000 – that’s 63.5% more.
As you compare credit cards, certain features of one particular credit card may stand out to you. Here’s what you should look for as you figure out which cash back credit card will benefit you the most.
Cash back percentage. The more cash back you can earn, the better. While cards that pay a flat percentage of rewards are easiest to understand, you may be able to earn more rewards overall on a credit card with a tiered cash back program. Choose based on your spending habits.
Categories for cash back rewards. Purchases are often grouped into categories, such as petrol, groceries, or travel. Choose a rewards card that pays the most cash back for the categories that you spend the most in. It’s not worth it to choose a cash back card that pays more cash back for hotels, for example, if you seldom stay in hotels.
Maximum earnings. Some cash back credit cards cap the amount of rewards you can earn. The maximum may apply to a certain category of purchases over a certain period of time, e.g. IDR15,000,000 in petrol and grocery purchases each quarter. Or, the maximum may apply for the year, e.g. IDR1,000,000,000 in purchases each year.
Minimum redemption amounts. Cash back credit cards may set a minimum amount of cash rewards you need to accumulate in order to redeem your rewards. In addition, you might have to redeem your rewards in certain increments. Minimum redemption requirements means it can take more time before you can actually receive the benefits from your cash back credit card.
Reward expiration. Ideally, your cash back rewards will never expire. However, if a cash back credit card has set an expiration for rewards, it should be long enough to give you a chance to use your rewards. If the credit card you’re considering has a minimum redemption amount and a rewards expiration date, consider whether you’ll be able to accumulate enough rewards to reach redemption before they begin to expire.
Signup bonus. It’s common for cash back credit cards to offer a signup bonus to new cardholders who spend a certain amount of money within the first several weeks of opening the credit card. For example, you might earn IDR1,500,000 cash back if you spend IDR10,000,000 on purchases within the first 90 days of using the credit card. As appealing as a signup bonus may be, consider whether you’ll be able to meet the spending requirements in the time you’re given.
APR. Interest rates on cash back credit cards tend to be higher than rates on cards without rewards. With a cash back credit card, you should always pay your balance in full each month to get the maximum benefit from your rewards credit card. If there’s a chance you will carry a balance, a card with a lower interest rate is better.
Annual fee. There are cash back credit cards with annual fees and others without. If you choose a credit card with an annual fee, make sure that you can earn enough rewards on the card within a year to offset the annual fee. For example, if a card has a IDR490,000 annual fee, you’ll want to earn more than IDR490,000 on your card each year.
Other perks. A credit card that comes with additional perks sets it apart from other cash back credit cards. The extra benefits can make paying an annual fee worth it. Typical perks include extended warranty, purchase protection, price protection, rental insurance coverage, and travel insurance.
While there are perks that come with a cash back credit card, there are also some pitfalls. Watch out for these so you don’t misuse your credit card and wreck your finances.
Higher interest rates. Higher APRs are common with cash back and other rewards credit cards. You may not be able to avoid getting a cash back card with a high interest rate, but you can pay your balance in full each month and avoid paying interest.
Potential annual fee. The better cash back credit cards may have an annual fee. Make sure you take advantage of your credit card enough to out-earn the annual fee you pay.
Temptation to overspend. The potential to earn rewards on your credit card may tempt you to spend more than you can afford. It’s important to keep your spending within a reasonable level based on your income and expenses. Continually monitor your balance and stop using your credit card if you are spending more than you can afford to pay each month.
Reward expiration. Check the fine print to find out whether your cash back rewards will expire. Remember to use your rewards before they expire otherwise you lose out on all your hard earned cash.
Excluded purchases. Knowing the ins and outs of your rewards program can keep you from being surprised at your rewards earnings. Cash back is rewarded based on a merchant code based on the merchant’s business type, so some purchases with a merchant may not earn rewards the way you would assume. For example, books purchased at a warehouse store won’t count toward cash rewards for bookstore purchases.
Forfeiting rewards. Certain mistakes can cause you to lose the cash back you’ve earned. With some credit cards, a single late payment can forfeit all the rewards you’ve earned. You don’t want to have to start over, so pay attention to what can cause a forfeit and avoid those actions.
While the opportunity to earn cash back may sound appealing, cash back credit cards aren’t for everyone. A cash rewards credit card is ideal for you if you:
Pay your balance in full every month. Paying interest on a cash back credit card, or any rewards credit card, is one of the worst mistakes you can make. Spending money on interest negates the rewards you’ve earned on your credit card.
Can responsibly use a credit card often. Earning the maximum amount of cash back rewards means using your credit card as frequently as possible. You must be disciplined enough to spend only what you can afford to pay back and to use your income to pay off your credit card balance rather than to make additional purchases.
Cash back credit cards are among the harder of cards to qualify for. Before you apply, consider whether your income and credit history meet these basic qualifications. Even if all of these applies to you, it doesn’t guarantee you’ll be approved, but it does mean you have a better chance of being approved.
Have excellent credit. Cash back credit cards are typically only given to applicants who have the best credit history. That means you always pay your bills on time and you keep your credit card balances at a reasonable level.
Have a minimum amount of recent credit card applications. Applying for too many credit cards in a short amount of time can cause your application to be rejected. Your application is more likely to be turned down if your credit report shows that you’ve been late on another payment within the past several months.
Make enough money to pay the balance in full. Income is another important factor that credit card issuers use to decide whether you qualify for a credit card. Generally, the higher your income, the more likely it is that you’ll qualify.
No recent late payments or delinquent accounts on your credit report. Your application is more likely to be turned down if you’ve been late on another payment within the past several months.
You can earn cash rewards just through casual credit card usage. You can also use smart spending strategies to maximise the amount of cash back you earn.
Spend enough to earn the signup bonus. You’ll only have a few months to earn the spending bonus. That may require you to spend more aggressively to make enough purchases to earn the bonus. Keep in mind that the clock starts ticking on the date your account is opened, which may be a few days before you actually receive your card in the mail. If your credit limit isn’t high enough, you may have to pay off your balance more often to make room for additional credit card spending.
Sign up for any special categories in advance. If you choose a cash back credit card that pays higher rewards in quarterly rotating categories, be sure to enroll at the beginning of the quarter. That way, you can start earning the maximum rewards from day one. Remember that you have a full three months to max out spending in the category, so focus on using your credit card for those purchases during that quarter.
Max out the spending in the special categories. Your cash back credit card may pay a higher amount of rewards in some categories, but there may be a cap on the rewards you can earn in these categories. Spend the maximum amount on these purchases to increase your cash rewards.
Pay your balance in full each month. Paying interest on a cash rewards credit card offsets any rewards you’ve earned on your credit card. Any time you carry a balance beyond the grace period, you’ll be charged a finance charge on your balance. Always pay your balance in full before the due date to avoid having a finance charge added to your balance.
Always pay on time. Late fees are another expense that can negate the rewards you’ve earned. Fortunately, late fees are completely avoidable. All you have to do to avoid paying late fees is make your payment ahead of the due date. You can schedule an automatic payment through your bank or credit card issuer to be sure your payment is made on time.
Use your credit card for purchases only. Cash advances and balance transfers do not earn rewards. Instead, these transactions take up credit that you could use for purchases that do earn rewards. Not only that, you may be unable to avoid paying interest and fees on cash advances and balance transfers. These fees will offset or even negate any rewards you’ve earned on your credit card. Use a different credit card for cash advances or balance transfers, if you choose to make these transactions.
Sally McMullen is Finder's credit cards and frequent flyer editor by day and a music maven by night. She's also one half of the Pocket Money podcast. Her byline can be spotted on Yahoo Finance, Dynamic Business, Financy and Mamamia as well as Music Feeds and Rolling Stone. Sally has a first-class Honours degree in Communications and Media Studies (majoring in Journalism and Professional Writing) from the University of Wollongong.
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