Should You Earn or Use Credit Card Cash Back?

Image Source: Getty Images

Here’s some guidance for managing money from credit cards.

Key Point

• Credit cards regularly offer cashback on purchases.
• You may be tempted to splurge on that money, but in some cases you can put it in the bank instead.

One of my favorite things about using credit cards is that you get rewarded for purchases you’ve already made. For example, last year, I earned over $700 in cash back on my most used credit cards just by paying for groceries, apparel, car fuel, household essentials, leisure, and more.

If you get money back from your credit card on a regular basis, you might be tempted to spend it on things you enjoy, such as travel, electronics, dining out at restaurants, and social activities. But is it the right approach? Or should you save on credit card cashback instead?

Manage cashback

Credit card cash back is actually bonus cash. It’s free money that you didn’t necessarily count on to pay your bills. You might be tempted to spend that money on something you love. However, while you should feel free to use credit card cashback under the right circumstances, if you need the savings, you may want to deposit that money in the bank instead.

As a general rule, it’s important to have enough emergency funds to cover 3 to 6 months of necessary living expenses. That way, if you lose your job or face a large unplanned expense (such as home or car repairs), you won’t have to go into debt in those situations. Instead, you have the option to pounce on your savings and avoid the long-term financial repercussions that come with piling up debt.

If you don’t have a full emergency fund, or no money at all in your savings account, you can bank every extra dollar you can get your hands on. This includes cashback. Get from credit card. Even if you only get $20 here and $30 there, small donations can add up over time if you don’t have enough emergency funds.

On the other hand, if you have all your emergency savings, it’s okay to spend your credit card cash back on things that make you happy. In fact, that’s the approach I tend to take.

I have a perfect emergency fund, so I take the attitude that credit card cash back is bonus money. They tend to spend it on fun activities with their families, such as theme park trips and weekend getaways.

you may be tempted to compromise

Being forced to deposit your credit card cash back in the bank every month can be annoying. But if your savings require a job, it’s a smart choice.

That said, there may be a compromise you can look at. A few If you already have money in the bank, you can decide to save most of your cashback and use some of it to splurge. That way, you can use that money to achieve greater goals while enjoying immediate gratification.