The benefits of using credit cards can’t be overstated: Imagine earning cash back, points or miles on your spending, plus gaining access to perks like travel insurance, purchase protection and free subscriptions to services like food delivery apps.
Cash-back cards are particularly popular among ordinary Americans: According to research from The Motley Fool Ascent, 72% of people with a net worth under $1 million have a cash-back credit card (compared to 59% of those with a higher net worth).
If you want to get good results with cash back credit cards, there are some mistakes you should avoid. Read on to learn what not to do with your cash back cards.
Featured Offer: Save money while paying off debt with one of these top-rated balance transfer credit cards
1. Not looking at your card’s bonus categories
If you have a card that offers you a higher rate on some spending categories, it’s worth paying attention to which ones and making sure you use the card to make those purchases. Otherwise, you’ll just be wasting cash.
If you have a card with rotating bonus categories that you need to activate, make sure you do so. Cards that work this way typically earn 5% cash back on those rotating categories, and if you can keep track of your actual spending with them, you can earn a lot of cash back in the process.
Since categories often change quarterly, consider setting a calendar reminder to pop up in your account to check them off so you don’t miss out.
2. Avoid cards with annual fees
You may think that paying a fee on a credit card is the opposite of what you want — for the credit card to pay you, not the other way around. But cards with annual fees often come with perks and higher interest rates than you’d get with a card with no annual fee.
My favorite grocery card has an annual fee, but it also has a high enough bonus rate on grocery purchases that it more than covers the fee. We’re barely halfway through the year and I’ve already earned more than double its cost thanks to my spending habits.
So deciding in advance to avoid cards with cash back and an annual fee might be a bad idea if you’re hoping to benefit from higher bonus rates and additional cash back.
3. Use only one card (with one exception)
Many of us at The Ascent are credit card fanatics – we enjoy applying for new cards and using several to earn cash or points on as many purchases as we can. But many people don’t go this route and instead stick with just one credit card for all their purchases. However, this can be a mistake if you’re missing out on easy opportunities to maximize your spending.
If you have a credit card that offers you a base rate of just 1%, I recommend adding a second one to cover more ground. Let’s say your current card offers you a rate of 1% overall, but also 3% on eating out.
It’s reasonable to assume that you also spend money on gas and groceries, and there are cards that offer higher rates in these categories as well. Choose one of them and you’ll earn more in other important spending categories.
There is one exception to this plan: If instead of a card with a 1% base rate, you have a card with a fixed rate that earns you 1.5% or even 2%, that might be the ideal option for you. And this is doubly true if you’ve had trouble managing credit cards in the past, don’t have a lot of time, or just aren’t interested in becoming a credit card nerd.
Personal finance is just that: personal. Follow your bliss!
4. Keep a balance
To be fair, carrying a balance on any type of credit card is generally a bad idea unless you have an active balance transfer or introductory APR offer and a solid plan to pay off the card over time before it accrues interest.
Credit card interest rates are high: According to the Federal Reserve Bank of St. Louis, the average interest rate for cards tested was 22.63% as of February 2024. No cash back card will pay anything like this in rewards, so it’s clear that carrying a balance will eat into what you’re earning — and then some.
It’s hard to get rid of credit card debt. Trust me, I’ve been there. I recommend increasing your income (perhaps through a side hustle?), making an effort to pay it off, and then re-thinking your relationship with your cards. If you can get to a point where you’re using them as a tool to benefit from purchases you’d make anyway, you’ll be able to enjoy earning cash back without having to take on high-interest debt.
Cash back credit cards can be a blessing for your finances, if you use them correctly. Avoid these mistakes and enjoy earning a little profit on your regular purchases.
Alert: Our top-rated cash back card now has a 0% introductory annual percentage rate (APR) through 2025
Not only is this credit card good, it’s so exceptional that our experts personally use it. It offers a long 0% introductory APR period, a cash back rate of up to 5%, and somehow, all with no annual fee! Click here to read our full review for free and apply in just 2 minutes.
