The truth about cash-back rewards

Breaking change: The original cash-back rewards program

A couple days ago, during my drive into work at the high school I work at, I was thinking of some more personal finance topics to explore and write about for you here on this blog. I recently rekindled my interest in personal finance, as I'm assisting a student in a personal finance class this semester. I'm also trying to clean up some debt, save more, and budget better, so being in this class could not come at a better time for me. I'm getting back to some basics, rediscovering some tips and strategies, and learning some new ones. I'm learning along with these students, and it's been a blast. Among the major highlights for me so far, I'm entering my third week trying the envelope budgeting system.

Anyways, I had this "genius" moment come to my mind during my drive to work the other morning, although I'm pretty sure I'm not the first one to have thought about this in this way. Here it goes:

Many credit card companies offer cards that give the cardholder cash back on purchases. It's an incentive to get as many people hooked on their product - credit cards - as possible, and it doesn't really cost these credit card companies anything to do so. Case in point using simple math: If a card gives you 1.5% cash back on purchases, you have to spend $1,000 on the card just to get $15 back. That doesn't sound like much of a deal, does it? Yet, we as consumers fall for this all the time, and I've certainly fallen for it over the years. It's a psychological trap. We think in our minds we're being rewarded, and to some degree, we are. But that assumes we're always able to pay off the entire balance of the card on time. The credit card companies are banking on us not always paying our full balances off on time so that they can charge huge amounts of interest. Suddenly, that "reward" is quickly eaten up by all that interest.

So how about trying this instead: Paying cash for as many things as you can, and putting away the coins that you get back in change. Look at breaking change as being the original cash-back rewards program. There's no risk of huge amounts of interest with this simple, back-to-basics strategy, and, before you know it, all that change is going to add up to some real cash.