Today’s money hack is related to saving money with credit cards.
Trying to maximize your savings? Make use of ‘cash back’ reward programs on credit cards to ‘get back’ a small portion of the money you spent making a purchase with that credit card.
Credit cards offer many benefits when used responsibly; they are a convenient alternative to cash, they come in hand during emergencies when cash is not immediately available, and they offer plenty of reward programs that consumers of credit cards can treat as savings. These reward programs are designed to encourage consumers to use credit cards, and as long as you use them responsibly, you are good to go.
You may wonder how cash back programs work on credit cards. Let’s take a step back and note that there are three basic types of incentives credit card companies offer to consumers:
- Reward points that can be used to buy different products,
- Air miles that can be used to purchase airplane travel tickets, and,
- Monetary incentives in the form of actual cash being deposited into your account. These are called ‘cash back reward programs’.
Cash back rewards are usually calculated as a percentage of the money you spent using your credit card, perhaps 0.5% or 6%. The Internal Revenue Service usually treats these cash backs as discounts on a sale, rather than income, which means you don’t have to pay taxes on this extra inflow of money.
Of course, this benefit is only material if you remember to payback your credit card bill each month, otherwise the interest rate you get charged on your credit card debt will reverse the cash back benefit on your card. Also, sometimes credit card companies fail to properly explain how reward programs work so be sure to fully understand the benefits you will receive by signing up. (Source: Consumer Financial Protection Bureau Monthly Complaint Snapshot Spotlights Credit Card Complaints)