For many consumers, cash-back credit cards seem like the invention of the century. All you need to do is swipe that card to make your purchase and you’ll be racking up not just cash, but rewards like air fare and zoo tickets in no time. What could be simpler than that?
Well, the truth behind how the cash-back system works is more complicated than it seems. As both economists and physicists so often say, there’s no such thing as a free lunch – and this is especially true for cash back credit cards. The money and rewards come at a cost, and while many consumers will never see the price tag for their transactions, the rest of the country does.
Here are a few things you should know about the dark side of cash back credit cards:
- They’re Bad for Business. The promise of instant cash back has led to more card swipes at the checkouts than ever before. While it’s a boon to credit card companies, this wave of plastic-only shopping is costing merchants millions of dollars in transaction fees every year. That’s because merchants have to pay a small portion of every credit card sale back to the credit card provider. It’s just part of the deal when you, as a store operator, lease a card-reading machine. After a day of processing swipes for rewards cards members, many businesses are out hundreds of dollars – dollars they would have kept in a cash-only universe.
- They’re Bad for Lower-Income Families. In order to stay profitable during this cash-back era, businesses have had to raise their prices. This is a fair move to make when a business processes cash-back cards exclusively, because the instant rewards that the cardholders receive will make up for the slightly higher prices those cardholders are paying. But not every business serves that type of customer. When less fortunate families need to buy the same goods with cash, they have to pay more – in real dollars. After running all the numbers, cash-using households end up paying an extra $21 a year simply because rewards cards exist. Households that use cash-back credit cards, on the other hand, actually make up to $750 in cash back.
- They Aren’t as Rewarding as They Seem. Perhaps the most disturbing thing about cash-back credit cards is that when you read the fine print, many of them aren’t the great deals they make themselves out to be. Almost all cash-back cards limit the amount of money you can actually receive. Just look for statements like “5% cash back on up to $1,500.” On top of that, most of these cards have expiration dates. You’ve got to spend your returned money by that date or you’ll risk losing it forever.
While cash-back credit cards have definitely made an impact on inflation and merchant fees, they’ve created a set of problems that are difficult to solve. Now that over 60% of the actively used credit cards in America are tied to some sort of cash-back program, the best thing a responsible consumer can do is to limit their card spending and look for stores that offer discounts to cash users. These cash savings are often better than what cash-back credit cards offer, and they’ll lighten the load our economy has been forced to bear.