How to use a cash back card as a savings tool

With some planning, you can save for emergencies or big expenses

Constance Sommer
Personal Finance Writer
Writes about personal finance, health care and other topics.

How to use a cash back card as a savings tool

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Most cash back card holders like to redeem their rewards for travel, gift cards or as a statement credit. But what if you used them for savings instead?

That’s just what Andy Mitchell of Murfreesboro, Tennessee, did. Last year, he decided to see how much money he could save using cash back cards.

By summer, he had acquired five cards, including the Amazon Prime Rewards Visa Signature card – which offers 5 percent back on Amazon purchases – and the Blue Cash Everyday card from American Express – offering 3 percent back on groceries. Neither card has an annual fee, but you need to be a Prime member to qualify for the Amazon Prime card.

Then he and his wife started spending “like we normally do,” he said, only spreading that spending out among the five cards – some of which also gave them an extra bonus for spending on gas and restaurants.

At the end of 2017, six months after he began, he’d saved $1,267 in cash back, $400 of which came from sign-up bonuses – a perk many rewards cards offer for meeting a minimum spend usually in the first three months.

Tips to use a cash back credit card for savings

Mitchell has put the money in a separate investment account and is logging its growth on his blog, “Black Sheep Millionaire.”

“I thought it would be a fun experiment,” he said, “to consider this free money and show people how we invest it.”

Interested in launching your own spend-to-save program? Here are some tips to help you navigate:

Look hard at your financial profile and lifestyle before using a cash back card for savings.

If you tend to carry a balance, cash back cards are not for you. If you roll over a balance on your account, you are canceling any potential benefits you may earn.

Jessi Fearon, a financial blogger from Atlanta, found this out the hard way, when she and her husband acquired cash back cards.

“We were spending money just to earn it on the card,” she said. “But the most we ever got back was $150.” Meanwhile, they failed to pay off their bills on time, and soon they were deep in debt.

Those with low credit scores may not be eligible for most cash back cards. Or they may only get one with a high APR, said consumer advocate Beverly Harzog.

Further, consumers who carry a balance on their cash back cards pay, on average, more than 3 percent more on interest than the national credit card average, a 2017 CreditCards.com survey found. 

Factor in annual fees. If the fee is too high and your spending too low, the fee can negate any benefits you will see from the cash back.

American Express, for instance, has a cash back card, the Blue Cash Preferred, that doubles the rate on groceries to 6 percent compared to the Blue Cash Everyday that Mitchell acquired – but that card comes with an annual fee of $95.

You’re more likely to save your cash back money if you know what you’re saving it for.

Head into it with a strategy.

You’re more likely to save your cash back money if you know what you’re saving it for.

“The first question is, ‘Why do I want to do this?’” Mitchell said.

For his readers, Mitchell suggests directing the funds at a retirement or emergency savings account.

For him, he’s setting his cash back savings aside in a separate investment account so he can, as he writes on his blog, “update (readers) on the growth of this FREE money!”

Others might target a specific big purchase, such as a computer or a mountain bike.

Martin Lynch, director of education at Cambridge Credit Counseling, suggests putting the cash back savings into a household maintenance fund.

So, the next time a pipe bursts, or your AC goes on the fritz, your credit card spending will ensure you have cash saved for that repair.

Consider a card that makes it easier to save (and invest) cash back.

Many cards offer the option of depositing your cash back rewards into a checking or saving account of your choice. Some card issuers, such as Chase, give you the option of transferring your rewards automatically to a savings account.

The following are just a few examples of cash back cards that make the choice of saving money easy, either by automatically depositing your rewards into investment accounts, or by giving you incentives to do so.

  • Fidelity Rewards Visa gives 2 percent cash back on all purchases and deposits the funds directly into a Fidelity account – such as a brokerage or 529 college savings account.

  • Ameriprise World Mastercard offers 1.25 percent cash back on all purchases when you redeem points in increments of 30,000 for $375 cash back into an eligible Ameriprise financial account (you can accrue 10,000 bonus points for spending $500 on the card in the first three months).

  • Schwab Investor Card from American Express automatically deposits 1.5 percent cash back on all card spending into an eligible, linked Schwab account.

  • Upromise World Mastercard offers up to 10 percent cash back on certain categories, including travel, dining and online shopping, while spending at participating department stores and movie theaters will earn rewards of up to 7 percent cash back. The rewards show up in the user’s Upromise account and can be redeemed in a variety of ways, including deposits to a 529 college savings account or a Upromise savings account – where you can earn 10 percent of all transferred cash back at the end of the year, as long as you keep a minimum balance of $5,000 on the account – or to pay down a student loan. Upromise is an arm of SallieMae bank, the private corporation that offers student loan services. Its ecosystem includes a shopping portal that also offers cash back rewards on purchases made on a number of rotating online merchants.
"Consider the money a supplement. It will come in handy. But it’s just a supplement to what you’re saving somewhere else."

Use online tools to maximize savings.

  • Stack rewards.
    Fearon, after giving up all her credit cards and vowing to go debt free, still finds a way to get cash back toward savings – on online purchases at least. She makes debit card purchases through portals such as Ebates and Swagbucks. Last year, doing that alone, she netted $1,200 in cash back, she said. Her goal for the 2018 money she’ll earn: improvements to the exterior of her house.

  • Invest your cash back.
    Another way to supercharge your extra-cash-savings effort is with apps such as Acorns and Digit. Acorns links to your credit cards, where it rounds up each transaction to the nearest whole dollar amount and sends that extra money directly to an investment account. You also can transfer the cash back you’ve earned on your cards. Digit works in a similar way, except it withdraws bits of money from your checking account into a Digit savings account, and awards an annual 1 percent cash bonus on the savings, payable each quarter.

Be realistic.

You’re talking hundreds of dollars a year back, maybe a couple of thousand. That’s not enough to retire on.

 

Video: Creditcards.com Cash back survey 2017

“Consider the money a supplement,” Harzog said. “It will come in handy, but it’s just a supplement to what you’re saving somewhere else.”

Saving with cash back rewards cards may not be for everyone, but when it’s done right, the effect can be almost magical.

Harzog uses her Discover it card for her usual spending all year long, not touching the cash back balance, just watching it grow.

Then, when the holidays loom, rather than scrambling to find extra cash in her checking account or applying for a new card to cover holiday-related expenses, she pays with the cash back she has been saving.

“Every Christmas I sit down at my computer and I’m like, ‘Go! Cash back!’” she said. “It’s a good, good feeling.”

See related: Best cash back credit cards, How cash back credit cards workCash back cards survey: Complex is out, simple is in


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Updated: 12-14-2018