You Should Be Using Cash Back Cards Unless You Like Throwing Away Free Money
Before we go any further, it is important to note that we are advocating the use of cash back credit cards if you are an experienced, responsible credit card user. That being said, if you are not using cash back cards for as many purchases as possible, you have to ask yourself if you like money or not. If you hate money, read no further.
What is a cash back card?
Well, many credit cards offer a reward when you purchase items. Some cards only reward certain purchases such as gas, online shopping, or travel. More and more cards offer rewards for all purchases.
Here is an example of how it works. Let’s say your cash back card offers 1.5% cash back on all purchases and you buy a pair of shoes for $150 total. That means, at some point during your statement period you will get credit for $2.25 in cash back. In most cases, that money is accessible when the associated statement cycle closes. In other words, you access to the cash the next month.
How to use the card without getting hit with interest
Using a cash back card only makes sense if you can pay off the balance before the end of the statement cycle. Look at it this way; only use the cash back card if you have the money to pay it off right away. If your card issuer is reputable, you can make as many payments each month as you want.
Cash back cards are an amazing tool for business owners
I send payments to each of my cash back card issuers 5-10 times per statement cycle and I get $200 – $300 in cash back per month. I use the cards to pay all of my bills and I use them for EVERYTHING my business needs. I buy inventory, supplies, and all of my online software subscriptions are paid for using cards.
This cash back pays for about 80% of my health insurance cost each month.
Pitfalls
Using credit cards is inherently risky. Afterall, card issuers make money when you owe them money. It is absolutely essential that only use the cards when you have the money to pay off the debt right away. If you are falling behind, stop using the card(s) immediately. The cash back reward should be a bonus and not a necessity when it comes to your personal finance or your business.
Tax implications
Many card issuers write off your cash back as a “rebate”, so you are not liable to pay taxes on your cash back. However, some issuers claim the cash back earned as something similar to “wages”. If you receive more than $400 in cash back rewards over the course of a year, you may receive a 1099. This means you are responsible for paying income tax on all of the cash back you received.
If you are experienced and disciplined with your cash back credit cards, they can be a complete game changer.
