Dubai: Cashback programs are incentives for people to use their credit cards, but they have often also caused many to slip into dangerously high debt levels. UAE-based financial planners advise how you needn’t overspend when earning such credit card incentives or benefits.
“If you pay off your balance each month, a cashback or rewards credit card can save you money and offer great perks, but you shouldn’t lose sight of your long-term financial goals in the name of rewards,” said Essam Kabeelali, an Abu Dhabi-based consumer credit advisor.
“The good news is that debt is completely unnecessary for getting the most out of your rewards card. With some simple tweaks, you can earn cashback rewards, by using a little more than your own current spending.”
Pursuing rewards can lead to overspending
For every credit card user, multiple studies conducted by top credit card issuers worldwide have indicated that a 1 per cent cash back program roughly yielded a $25 (Dh90) reward each month and, on average, raises spending by $68 (Dh250) a month and credit card debt by $115 (Dh420) a month.
“As average credit card now comes with an annual interest rate of over 17 per cent, so when trying to earn 1 per cent to 3 per cent cashback while also paying over 17 per cent in interest, the math just doesn’t add up,” added Kabeelali.
“There is no amount of rewards that makes up for interest charges incurred from leaving a balance on your credit cards. You must pay off your balance each month to truly get any benefit from rewards credit cards.”
“Carrying a credit card balance every month can be worse if you’re using a cashback card, which is considered a rewards credit card because you earn a bonus on your spending,” explained Rajesh Markara, an Abu Dhabi-based debt advisor.
“Cashback credit cards tend to have higher interest rates, on average, than others. Anyone who carries a credit card balance, even occasionally, should prioritise interest rate over rewards. If you’ve generally been struggling to pay off debt, try avoid credit cards entirely and stick to debit or cash.”
How to maximise cash back with your credit card
A common mistake made by credit card users who commonly make use of cashback perks, according to Markara, is assuming they need to start spending more money to get more perks. “If you’re looking to buy in order to inflate spending totals, this is the wrong approach,” he added.
“Many cashback credit cards offer a welcome bonus if you spend a certain amount within a specific time frame. However, as long as you’re not overspending to reach it, it’s a good way to push your cashback earnings even higher.”
It does help to make large purchases with the cashback credit card instead of cash or debit, the key here is to only do this if you have the cash on hand to buy these items and were going to do so anyway, suggests Kabeelali.
Avoid rationalising major purchases you can’t afford
“By using your cashback cards with enough cash on hand to make the large purchases, you are simply doing planned spending in a more efficient and profitable manner. Avoid rationalising major purchases that you don’t want or can’t afford just because you’ll get the rewards,” he added.
Also both Kabeelali and Markara suggested keeping mind that credit cards offer cashback rewards in the assurance that the cardholders' increased spending will exceed the money spent on cash rewards. Cardholders then pay for cashback through higher interest rates and merchant fees.
“Alternatively, you can use a cashback app or website to find potential deals on goods while also making a percentage of your money back. In case of apps or sites, the more you use your cashback rewards programs, the more money you stand to earn,” added Markara.
Key takeaways
Cashback cards can appeal to just about anyone. As the name implies, these cards reward you by refunding usually around 2 per cent of all your spending. So spending Dh2,000 on your cashback card will net you Dh40 at the end of the month.
Cash back rewards are cardholders’ preferred loyalty perk, according to CreditCards.com. A recent study found that about two-thirds of cardholders choose cash over travel rewards like airline upgrades.
“Cashback cards are for you if you are comfortable doing most of your spending with the credit card so as to maximise your cashback reward. But if you hate using credit cards for anything other than when they’re mandatory, it may not be for you,” noted Kabeelali.
“The bottom line is that while a cashback credit card can make a rewarding addition to your wallet, use it for purchases you make regularly to maximise credit card rewards, and avoid overspending and carrying a balance to get the most from your card.”
_resources1_16a4a1613d8_small.jpg)
