The automatic way that cash back credits cards work is perhaps the key to the popularity of these programs. It’s a simple alternative to other savings programs. For example, the consumer who formerly clipped coupons or who traveled between stores with sales now saves the extra time. Using a general cash back card, these percentages accrue automatically. The consumer has the knowledge that purchases come with discounts without additional effort.
Shopping decisions become streamlined. The consumer decides on the program when applying for the card. After that, the extent of choices depends on the particular cash back plan. Store proprietary programs may limit the shopper to locations for which they have cards. General plans provide discounts on nearly every purchase, in almost any shopping location.
When a shopper has multiple cards, there are a variety of strategic options. These, of course, depend on the particular cash back rewards credit cards that shopper has. Multiple cards open up options such as following sales to increase the value. The consumer spends less on a product because of the sale and earns the cash back percentage. Not all shoppers want to leave sales and coupons behind once they join a cash back rewards program.
Is Cash Back Credit Card Program Worth It?
The value of a cash back rewards program rests in the perception of the consumer. Rewards cards often come with fees and higher percentage rates on balances. Shoppers who frequently carry balances from month to month find that the interest charges outrun the savings from the cash rewards. While an occasional balance may not destroy the advantages, those who carry balances regularly are better served with low interest cards.
High rewards thresholds could also limit the value of a cash back credit card plan. With these plans, a consumer needs to spend certain amounts each month or annually to qualify for the full value of the cash back percentage. For those with high purchase loads and equally high cash flow to cover monthly balances, these cash back plans offer significant savings. A shopper who overspends to reach reward thresholds will soon find the cash back plan too expensive.
Working a cash back rewards card category, however, could be an effective way to benefit from a cash back plan. Take a family with multiple vehicles and a heavy driving load, for example. Since fuel costs would be a significant cash expense monthly, joining a cash back reward program and issuing credit cards to each driver maximizes fuel cash back savings.
Using the grocery category of a cash back card works the same way. Say, for instance, a shopper uses a particular grocery store chain, perhaps from preference or convenient location. Using a cash back card program specifically for that store may provide higher than average percentage rates. With their grocery shopping happening in this store, the savings automatically build. This may be on top of any store sales or coupon discounts.
Pros: Reasons to Get Cash Back Rewards Credit Card
Savings on all purchases made
This is a good option for a consumer who already uses credit cards for the majority of their buying. Look for a cash back credit card program that pays the highest rate across all purchase categories, preferably with low or no annual fees.
Purchase category savings
For shoppers who use participating stores on a regular basis, or who target savings in particular shopping categories, targeted cash back savings plans may offer a higher discount on a more narrow channel of purchases. Gas, groceries and drug stores have strong cash back program support in Canada.
For those who find coupon clipping and comparing sales tiresome, cash back credit cards offer various levels of savings with no active requirement for the shopper. The calculation of the rewards come automatically, at the cash register or on the monthly statement. There’s no need to monitor other savings avenues to gain a reward.
Additional savings for the frugal shopper
Consumers who do enjoy the challenge of coupon clipping and sale chasing can add to their savings with a general cash back reward card that pays a set percentage for all purchases made with the card. In many cases, cash back cards provide the shopper with a rebate on top of already discounted purchases.
Combining two cash back credit cards
Since specialized cash back programs frequently feature bigger savings on narrow purchase categories, using two may maximize cash rewards. The secret to that strategy is pre-planning purchases to match cash back categories. It can add up to greater returns at the year’s end.
Cons: Reasons to avoid cash back rewards credit card
The drawback of any credit card is the interest rate attached to balances carried over. Depending on the cash back reward credit card, a consumer earns between 1 and 6 percent cash back on some or all of their purchases. If interest on the card was also 1 to 6 percent, then the cash back rewards would pay the finance charges. However, carryover interest is much higher than the rate of cash back savings. While cash back earnings could be applied to a credit card balance, it wouldn’t make a significant dent. A shopper needs to continue to make purchases to earn rewards, so the additional purchases pile on top of previous balances. Cash back rewards cards are best suited for consumers who pay off balances monthly.
Changed spending habits
Qualifying for some cash back rewards requires certain levels of spending, as we saw earlier in this article. When a consumer already meets those levels of spending, switching over to a cash back credit card may be a useful strategy. However, when a shopper has the temptation to make additional purchases over their usual load, a potentially dangerous overspending condition arises. Spending can’t outweigh income. This leads to credit card balances and that kills the cash back program benefits.
Other false economies
There are shoppers who enjoy the perceived cachet of premium cards, though these often carry annual fees. The same holds true for cash back rewards cards. The more exclusive cards do have the potential for bigger savings. However, there may be minimum spending thresholds. The cost of the card must be factored against the annual benefits as well. Should a consumer move from a no fee card, this affects the cash back earnings in real dollar terms. A shopper moving from one premium card to another may not mind, particularly if the fees between cards are comparable.
Are cash back credit card rewards taxable in Canada?
The good news is that consumers do not need to declare cash back rewards from a credit card program as income. Personal credit cards have no limits or restrictions in terms of rewards and taxation. In fact, the money that comes back to a consumer through such a program really amounts to a rebate or discount on money that they spent. In essence, the shopper gets their own money back.
However, there are some restrictions to cash back rewards and work-related expenditures. When a person is reimbursed for business expenses they paid for with personal cards, there is no need to report rewards, whether these come as cash, miles or points. A problem arises when, for example, the person converts points to cash. In that case, the points now have a cash value and could be a taxable benefit. This doesn’t affect cards with cash back as the rewards focus, however.
Business expenses paid for on a personal card must be incidental. An employer cannot, for example, allow a staff member to make all office supply purchases on a personal card to earn the cash, points or miles benefit. The value of the reward would be, in this case, a taxable benefit. If it is not recognized as a form of income, the Canada Revenue Agency may treat it as a tax avoidance scheme.