Don't Make These 4 Mistakes With Cash Back Credit Cards

The benefits of using credit cards can't be overstated -- imagine earning cash back, points, or miles on your spending, along with getting access to perks like travel insurance, purchase protection, and free subscriptions to services like food delivery apps.

Cash back cards are particularly popular with ordinary Americans -- according to research from The Motley Fool Ascent, 72% of people with a net worth under $1 million have a cash back credit card (compared to 59% of those with a higher net worth).

If you're going to come out ahead from using cash back credit cards, there are a few mistakes you want to avoid. Keep reading to learn what not to do with your cash back cards.

1. Not watching your card's bonus categories

If you have a card that earns a higher rate on some spending categories, it's worth paying attention to what these are and ensuring you use the card to make these purchases. Otherwise, you're leaving cash back on the table.

If you have a card with rotating bonus categories that you must activate, make sure you do. Cards that work like this often earn 5% back in those rotating categories, and if you can target your actual spending with them, you stand to earn serious cash back in the process.

Since categories often change quarterly, consider setting a calendar reminder to pop into your account and activate them so you don't miss out.

2. Avoiding cards with annual fees

You might assume that paying a fee for a credit card is the opposite of what you'd want -- let the credit card pay you, not the other way around. But cards with annual fees usually have perks and higher earning rates beyond what you'd get with a no annual fee card.

My favorite grocery store card has an annual fee -- but it also has a high enough bonus rate on grocery purchases that I more than cover the fee. We're just halfway through the year now, and I've already earned more than double its cost thanks to my spending habits.

So deciding out of hand to skip cash back cards with an annual fee could be a bad idea if you're hoping to benefit from higher bonus rates and extra cash back.

3. Only using one card (with one exception)

A lot of us here at The Ascent are credit card nerds -- we enjoy applying for new ones and using multiple cards to earn money or points back on as many types of purchases as we can. But many people don't go this route and instead stick to just one credit card for all their purchases. This can be a mistake if you're missing easy opportunities to maximize your spending, though.

If you have one credit card that earns a base rate of just 1%, I recommend potentially adding a second to help you cover more ground. Let's say your current card earns 1% across the board, but also 3% on dining out.

It's reasonable to assume that you also spend money on gas and groceries, and there are cards out there that earn higher rates on these categories, too. Pick one of these, and you'll be earning more back on other big spending categories.

There's an exception to this plan: If instead of a card with 1% base rate, you have a flat-rate card earning 1.5% or even 2%, that might be just right for you. And this is doubly true if you've struggled with managing credit cards in the past, don't have a lot of time, or just aren't interested in becoming a credit card nerd.

Personal finance is just that -- personal. Follow your bliss!

4. Carrying a balance

To be fair, carrying a balance on any kind of credit card is usually a bad idea unless you have an active balance transfer or intro APR offer and a solid plan to pay the card off over time before you're walloped with interest.

Credit card interest rates are high -- according to the Federal Reserve Bank of St. Louis, the average rate for cards assessed interest was 22.63% as of February 2024. No cash back card will pay anywhere close to that in rewards, so it's clear that carrying a balance will eat up what you're earning -- and then some.

Credit card debt is hard to get out of -- trust me, I've been there. I recommend increasing your income (perhaps via a side hustle?), digging in to pay it off, and then reframing your relationship with your cards. If you can get to a place where you use them as a tool to benefit from purchases you'd make anyway, you can enjoy earning cash back without carrying high-interest debt.

Cash back credit cards can be a boon to your finances -- if you use them correctly. Avoid these mistakes and enjoy earning a little back on your regular purchases.