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Scoring cash back from a credit card could put free money in your pocket. But read on for a better way to get money for free. [[{“value”:”
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Using a credit card is a convenient way to shop. With a credit card, you don’t have to worry about having enough cash on hand. Plus, credit cards often allow you to rack up cash back on your purchases. And sometimes, you can get bonus cash — for example, 2% or 3% on purchases like groceries and gas, which are items you’re likely buying anyway.
And while a 1% cash back rate would put $1 back in your pocket per $100 spent, a card offering 2% or 3% gives you $2 or $3 instead. Over time, that extra money adds up. But while credit card cash back is nice to have, you should know about a less risky way to score free money.
The problem with credit card cash back
There’s nothing wrong with using a credit card for convenience and earning cash back in the process. But you shouldn’t count on cash back from your credit card to pad your wallet.
The reason? You have to spend money to get that cash back. And your brain might trick you into overspending because it knows there’s an incentive to rack up a balance.
Say your credit card gives you 1% back on all purchases, and you spend $2,000 a month. That’s $20 coming your way in cash back, which is a very small percentage of your total tab.
But you might rationalize that $2,000 in spending by saying, “Well, at least I’m getting some of that money back.” In reality, though, you’d be better off cutting your spending by $200 a month and boosting your savings that way.
Better ways to earn free money
Here are two better options for earning free money.
A savings account or CD
Rather than look to your credit card as a source of cash back, try earning risk-free cash back by putting more money into the bank. Whether you opt for a savings account or certificate of deposit (CD), you get a safe place to put your money, and you earn interest without having to go out and spend money.
If you’re not sure whether a savings account or a CD is right for you, think about whether you can afford to cut off access to your money for the duration of a CD. If you withdraw from a CD early, there’s usually a penalty fee involved. So if you’re torn between a savings account and a 12-month CD, for example, ask yourself what might happen if you can’t use your money for an entire year.
And either way, make sure you leave enough in a savings account to cover at least three months of essential bills before putting money into a CD. That’s your minimum emergency fund.
An investment account
You may also decide that instead of a savings account or CD, you’d like to invest in a brokerage account instead. This carries more risk than a savings account or CD because your principal is not guaranteed.
You could invest $1,000 and see your portfolio value fall to $800 a few months later. If you put $1,000 into a savings account or CD, you can’t lose any of that money as long as your bank is FDIC-insured and your total account balance is not above $250,000.
But over the past 50 years, the stock market’s average annual return has been 10%. If you put $1,000 into stocks and score that same return, in 20 years, your $1,000 could be worth a little over $6,700.
And yes, there is some risk involved in investing, but you can lower it by investing over a long period of time. And while you’re technically spending money to make money, since you’re buying stocks, you’re spending money on investments, not things, which is the case with a credit card.
There’s nothing wrong with continuing to earn credit card cash back. But if you want to actively chase free money, savings accounts, CDs, and investments are all better options.
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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Maurie Backman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool has a disclosure policy.
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