A cash-back credit card can be a good way to put money in your pocket while spending on things you normally would buy, such as groceries or gas. They allow cardholders to earn a certain percentage on purchases and redeem those earnings, usually as cash, gift cards or statement credits.
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Unfortunately, many cardholders don't take full advantage of this perk, says Alex Matjanec, co-founder of MyBankTracker.com, a banking-information Web site. A 2011 study by marketing research firm Colloquy found that one-third of all rewards--everything from airline miles to cash-back rewards--worth $16 billion go unredeemed each year.
With cash-back rewards specifically, rather than cash out earnings, Matjanec says many cardholders let them accumulate and use cash-back programs as a piggy bank. Although some credit card companies offer customers incentives for waiting to redeem earnings until they accumulate a certain amount, Matjanec says cardholders can be better off cashing in every month or at least every quarter. Here's why:
You risk losing your rewards or having them decline in value. Matjanec says that banks can change the terms of their programs at any time. As a result, the value of your rewards can drop. If you're delinquent on your account and it is closed as a result, you'll lose your rewards. And companies often have expiration dates on redeeming rewards. Or you could lose all of your rewards if a company ceases operations. Customers of PerkStreet Financial lost their unclaimed balances when the rewards-based online bank closed in September.
You could be using your rewards to pay off your card balance. You could be banking rewards to pay for a big purchase. But you're really not saving any money if your card balance (and the interest you're paying on it) is growing each month. Matjanec recommends using your rewards to pay down your balance. Some card companies allow you to redeem your rewards for statement credits, which you can use to reduce your balance. If your program doesn't offer statement credits, simply have the cash deposited in your checking account, then use it to help pay your credit card bill, he says.
You could be using rewards to make purchases. Again, maybe you're saving up your rewards to get something big. But what difference does it make to your bottom line if you save $500 on, say, a computer or $500 over several months on regular trips to the supermarket. You could be redeeming cash-back earnings regularly to purchase things you need.