How much money are you really getting from cash-back credit cards?

Cash-back credit cards offer a more predictable return than travel credit cards. But will you earn what you think you’ll earn?

Most people are familiar with travel rewards credit cards. You buy things with the credit card and you earn miles or points that can be used for travel.

These can allow you to earn free or reduced-price travel, though it can come with a cost, especially if you redeem for low-value travel. If you’re not making a serious high-value travel purchase (like international business class), you might be wasting your points and miles.

Some people express frustration at these travel cards, as they may have earned a ton of miles, but find that they can’t redeem them for anything. Sure, an airline might advertise flights for “as low as” 25,000 miles, but when you go to redeem and the flight you want costs 150,000 miles, it’s pretty dispiriting.

For those people who don’t want to play thisgame, there is a different kind of credit card for them: a cash-back card. This is a credit card that offers a certain percentage of your spend back in cash or credit. Much simpler than trying to play the travel game, right?

But is the cash-back game worth playing? Let’s investigate.

The math on cash-back

There are many different cash-back credit cards out there. I’m not going to link to any of them but you can find them easily.

The best of these offers that I’ve found offer 2% back on general purchases. So if you spend $1,000 on the card, you get $20 back, so it’s as if you only spent $980.

This can certainly add up. Spend $10,000? You only spent $9,800. That’s real money.

Now, some cards offer special deals on certain spend categories. For example, some cards will offer 3% cash back at gas stations, or 5% cash back if you book travel in their portal, etc. But since most spending is not specialized spending, I’m going to talk primarily about the 2% baseline.

Travel rewards versus cash-back rewards

In my article on how to maximize travel rewards, I noted that if you aren’t making a return of 2 cents per mile/point of travel spend, then you are wasting your time and money. This cash back scenario is the reason why I say that.

With a 2% cash back card, which pretty much anyone can get, you get 2 cents back per dollar spent, which typically translates into one travel mile or point. If you have a travel credit card, and you redeem for 1 cent or 1.5 cents per mile/point, then you would have done better to just use a cash back credit card, bought the travel outright, and saved yourself all the bother.

But is cash-back worth it?

On the surface, getting a 2% discount on whatever you purchase seems obviously better than no discount at all.

The problem is that we’re not comparing 2% to 0%. The psychology of spending needs to come into play here.

Numerous studies show that people spend more money when using a credit card. In general, paying with a card makes people less conscious of what they’re spending, and when you don’t need to worry about overdraft (as with a debit card), this can make you not think about your spending entirely.

Remember, when you use a credit card, you’re not paying for something; you’re making a promise to pay for it later. It’s a totally different thing.

And it’s so much easier to promise to pay for something later than it is to pay for something now, which is why people spend more.

The famous Dun & Bradstreet study says that people spend 12-18% more with credit cards. But let’s say we seriously round down and say that you’d only spend 4% more with a credit card.

Then a cash back credit card is still not going to provide a decent value. You’d be spending 4% more and getting 2% back.

This is why I never recommend using credit cards for everyday spend. Sure, use it here and there, for big purchases when purchase protection is important, or when you’re out of the country. But every day spending should be done with your actual money, not a promise to pay later.

Bottom line

I don’t think cash back cards are bad. I actually think they’re more honest and straightforward than some travel cards, which can obfuscate the value you’re actually getting…or rather, not getting.

But I’m not convinced that you’re always getting good value from a cash back card. When you sum it all up, you may not be getting the cash you expect to receive.