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Seize the Cash-Back Balance

Sarah Lindner

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NEW YORK (MainStreet)—Recent college graduates who have landed a job immediately following graduation may think the worst of their battles are behind them, until they realize it's time to sign up for a credit card. Most want to reap the benefits of maximum rewards without falling prey to the oft-feared credit card debt.

So how to find a balance without making it a compromise?

Rewards cards can lead a credit card newbie down the path of temptation and toward high rates, whereas low-APR interest rate cards protect the consumer by charging him or her less in interest fees. A happy medium—that is, a safe and rewarding bet—might be cash-back credit cards, a way for recent grads to have their cake and eat it too.

Nick Scheumann, a Wealth Partner at Hefty Wealth Partners in Auburn, Indiana, thinks cash back is the way to go for recent college grads.

"For college graduates, cash is a much higher priority than earning trip miles or hotel rewards," said Scheumann. "College graduates should be focused on increasing inflows to help eliminate debts. I think cash back is more in line with that than the other rewards, and typically has much more flexibility too." According to Jason Bushey, editor-in-chief of Creditnet.com, cash back cards are also advantageous because of their inherent simplicity: spend a dollar, earn a percentage of that dollar back.

"It's this simplicity, and the promise of money back on purchases, that makes them an extremely popular kind of card to carry," said Bushey. "While rewards points can be more lucrative per dollar spent, they can also be pretty challenging to manage."

And the annual fees of airline and other rewards cards, according to Brian Kelly – also known as The Points Guy—have the potential "to eat you alive." This isn't always the case, but it is a good idea for new grads to be aware of the fee structure of a particular card before applying.

Cash-cards are also attractive because of their accessibility to new consumers.

"They're more widely available to new consumers, including recent grads ready to begin building credit," said Bushey. "Issuers like Barclaycard and Capital One have made consumers with limited or less than perfect credit eligible to earn cash back on purchases."

So how do you choose the right cash back card for you?

"The trick with cash back cards is to know which categories you'll earn the most on per purchase—be it gas, groceries, or both – and to use this card exclusively for these items," said Bushey. "That way you're netting the most cash back possible and the quickest rate on purchases you planned on making anyway."

While cash back cards are great for their flexibility, simplicity and accessibility, recent grads need to look into a particular card's annual fee before signing up, according to Howard Dvorkin, founder of Consolidated Credit and author of Credit Hell: How to Dig Out of Debt (Wiley, 2005).

"Cash back cards often require an annual fee ...which can be a disadvantage if the user is not receiving more than that amount in cash back," Dvorkin said. "Only consumers who can guarantee a full monthly payment should open this type of card. It's a great reward for people with good credit."

--Written by Sarah Lindner for MainStreet