Unwise use of cashback credit cards can destroy your credit score, so be careful.
The temptation is there – when you get a new card that offers to give you twice the reward if you hurry up and use this card in the first couple of months, you might want to go out and spend money. After all, there are things you need for your home you will probably buy in the coming months, so why not do it now – while you can get 4% cash back?
The obvious reason is that no matter when you use the card, you will end up paying for your purchases, and if you can not write a check to cover when the statement arrives, you will be charged interest. That alone could offset the rewards you might receive.
If your new cashback card is a “general purpose” that rewards you for each purchase, you might be tempted to charge all your monthly expenses on the card, even if you intend to repay it at the end of month.
This might be a good plan – but only if the credit line on this new card is large enough to allow you to charge your expenses without going anywhere near the credit limit on the card.
Remember, even if you have six cards with zero balances, maximum load on a single card will significantly hurt your credit score. Even if you pay the balance each month, your credit report shows the high balance on your statement, and it can bring high credit ratings to mediocre scores.
If you have no intention of buying a car or a house in the next two years, you might not care. But if you anticipate a major credit purchase, you will save more money by maintaining a high credit score you could ever come back in a credit card reward.
Just 1/4% more interest on a $ 250,000 home would add about $ 52 per month for payment of your home. And not just for a month – for the duration of the loan.
Another thing to remember about cash back credit cards and rewards – you need to buy them as often as you are allowed. The card issuer could change the conditions under which they pay their rewards, and if you fail to use your card for a long period of time, you might see them disappear.