Is it worth paying for a cashback credit card?

This is an article in response to Sun's article  on the new American Express cashback card. It should enlighten its readers on the pros and cons of paying for a cashback card. Hope you enjoy reading:


Sun at recently posted an article about American Express replacing their old Blue Card Cash card, which we will refer to as card A, with the new American Express Blue Card Preferred Card, which we will refer to as card B. Sun emphasised the benefits of the new card B over A. Whilst card A has 3% cashback on supermarkets, 2% cashback on gasstations, and 1% cashback everywhere else, however the new card B has 6% cashback on supermarkets, 2% cashback on gasstations, and 1% cashback everywhere else.
As you can see the only differential factor is that the supermarket cashback percentage has doubled with the new card. However, with this added incentive comes the extra cost of the card, and at an annual rate of $75 it isn't cheep.
Sun's article had me wondering how much extra you would need to spend to be able to make the new card B a worthwhile purchase.

Assumptions to be made

To simplify this experiment I need to make some assumptions:
First, We will focus on the supermarket purchases only (to make back the $75). This is because the other cashback incentives are equal for both cards and so if this difference did not exist one might as well choose the original card A.
Second, Sun mentions some referral bonuses of $75 each time you refer someone to the card who is accepted. Furthermore there is a potential sign on bonus of $150 cashback if you are able to spend over $1000 in your first three months. For simplicity we will ignore these incentives and come back to them at the end.

The mathematics - don't be too scared!

Simply to cover your costs (just looking at the one difference between the cards - supermarket expenditure) you would have to spend $1250 a year on supermarket purchases to receive $75 on card B. This amount of spending on card A would earn $37.5. Hence to make sure that card B is worth the purchase you would need to make sure that you spend more than double this amount. Spending $2500 a year in the supermarket would earn $150 cashback, $75 profit (after you've paid for the card). Whereas, with card A you would earn $75 anyway spending $2500.
So to make spending on card B worthwhile you would need to spend more than $2500 in the supermarket a year. I doubt whether many of us have food bills this large. In which case I would not recommend this sort of card for most people. The high cashback rate seems to be a tempting Syren, but with a deadly $75 bite,


I would recommend avoiding these sorts of cashback cards such as B unless you are entirely sure you can make your money back.Obviously the cashback opening incentives will help. This is something I removed in my original assumptions. Of course, if you can make sure that you are referring someone new to the card each year, card B is definitely the better choice to go for. Additionally, if you are able to NATURALLY spend $1000 in your first 3 months on all purchases and receive the extra $150 cashback then card B is definitely worth your while for at least a year.

What are your views on paying for cashback cards? Is it worth the costs?

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Liquid Independence said...

I don't use cashback cards that charge fees because I don't use my credit card to buy a lot of stuff. But they might make sense for households with larger expenditures.

Mr. Moneybanks said...

But what if you replaced all your spending with credit card spending. Surely you are missing out on some of the benefits of credit cards? I will write a post soon but the first that spring to mind are cashback, points, and extra interest in your bank account.

Emily @ evolvingPF said...

I posted a comparison of the 3 Amex cashback cards for our family just today. We don't spend enough to justify the $75 fee.

Mr. Moneybanks said...

You're absolutely right Emily, one needs to workout what their yearly spending patterns are to see if it's worth it