These days we see offers all the time for credit cards offering 1.5 times cash back or double your cash join now offers. Free money sounds great to most people, I mean who does not like free money? Some of these very credit cards offer sign up bonuses worth between $100 and $500 depending on the card.
Obtaining these credit cards in and off itself is not dangerous, but they can be. How can obtaining a credit card with no annual fee that offers cash back on every purchase be dangerous? For one the offers of a free $100 to $500 just for signing up often come with a caveat that you spend between $500 and $5000 in an allotted time frame, often with in 90 days of opening the account. It is easy after that point to forget how high the balance truly is then get slammed with interest. In the blink of an eye the sign up bonus you received was just eaten by interest rates.
Now I must say I am not advocating avoiding these credit cards. Used properly they can be of great value. The key word here however is “when used properly”. We need to remember these credit card companies are businesses not philanthropies, they do not make money by paying you to use their services. Where they make their money is by offering you just enough credit so that you get tempted to use this credit and then over extend your finances. Once you have spent enough money on credit that you can no longer pay the balance in full by the end of the statements grace period the credit card company has just transformed you into a cash cow via the interest. Miss a payment? Again you become a cash cow in the form of late fees and penalty interest rates.
The way to avoid these problems is to sign up, obtain the cards as planed but use them intelligently. This of course means paying off the balance each month in full to avoid interest. Credit card interest is not by any means cheap. You could easily totally erase any cash back and sign up benefits if you incur interest on your recent charges. You can however profit from using these type of credit cards by using your credit card instead of your debit card then paying back what you borrowed before the grace period ends, there by earning your cash back and ducking out of any interest charges.
Also keep in mind the best cash back deals feature rotating categories. This means for 3 months you might get 3% cash back for dining out then the following 3 months after that may be for select department stores only. To further complicate matters many of these credit cards require you to opt into that quarters cash back bonus categories. You also need to read the fine print for any credit card reward program as there are always or nearly always catch 22s buried in them.
Also avoid trying to work the system. I have known several people who would apply for these cards, use them for 3 months to receive the sign up bonus then close out the account. Big mistake on their part which they paid dearly for in the form of a decent ding to their credit score. Credit scores calculate the percentage of available credit that you are using, so closing out a credit card can really hurt your credit score.
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