Credit Card Cash Offers – Bonus or Bogus?

Over the past few weeks, there has been a barrage of credit card promotions promising lucrative cashback offers for those who sign up for the new card and spend a certain amount of money. These offers are circulating throughout Lakewood, Brooklyn, and other frum areas who have even seen them on car windshields and as mailbox stuffers.

The highly aggressive broadcasting of these offers has worried many, so much so that certain not-for-profit organizations have begun putting out anti-ads warning customers of the dangers of using credit cards. I have received several calls and messages asking for my opinion; I asked some of these callers how they thought I would reply, and they were surprised.

In the competitive world of credit cards, offers like receiving $950 cash back for spending $6000 in the first few months are increasingly popular. These cards can be highly beneficial, offering substantial returns while encouraging large, rapid purchases. These bonuses come with risks that need careful consideration to avoid financial pitfalls.

The immediate reward of such cards is their most significant appeal. For example, a 16% return on spending is considerably higher than typical credit card rewards. They are particularly advantageous for those planning substantial expenditures, such as home improvements or high-cost electronics. The cashback provides a timely boost to your cash flow, which can help pay down the card balance or fund other necessary expenses. Additionally, many of these cards offer extra benefits like extended warranties, purchase protection, or travel rewards, adding to their overall value.

Despite these benefits, there are significant risks. The primary danger is the encouragement of overspending. The need to spend a considerable amount in a short period can push consumers beyond their budgetary constraints. Furthermore, these cards often come with high interest rates and fees. When the balance is not paid off promptly, the interest accrued can quickly negate the benefits of the cashback. Moreover, the lure of high rewards can lead to accumulating significant debt, especially if there is no clear repayment plan or if the cardholder already has balances on other credit cards.

The impact on credit scores is another critical consideration. High utilization of credit limits, especially if not paid down quickly, can adversely affect credit scores. Additionally, applying for multiple credit cards to chase high cashback offers can lead to hard inquiries on your credit report, potentially reducing your credit score. With banks continually monitoring customer scores, they have the right to automatically increase credit card interest rates just because of the change in credit.

To maximize the benefits and minimize the risks of these credit card offers, consumers should adopt a strategic approach. This includes ensuring that the required spending to earn the cash back aligns with one’s budget and planned expenses. It’s crucial to avoid interest charges by paying off the balance before the due date. Understanding the card’s terms, including any limitations on the cashback offer, interest rates, and annual fees, is essential. Monitoring the impact of new credit applications on one’s credit score is vital.

While credit cards offering high cashback rewards for significant spending in the initial months can be highly beneficial, they demand disciplined financial management. By considering one’s spending habits and financial situation carefully, these cards can be a valuable part of a consumer’s financial toolkit, provided they don’t lead to a debt trap. Each situation must be evaluated on a personal and individualized level, preferably with the help of a financial expert.

Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Approved Funding is a mortgage company offering competitive interest rates as well as specialty niche programs on all types of Residential and Commercial properties. Shmuel has over 20 years of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. He can be reached via email at Shmuel@approvedfunding.com.

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