Credit Cards

Why it pays to get a credit card with an annual cash back reward

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A lump sum reward could benefit you more than rewards that roll over every month.

Key points

  • Some credit cards allow you to collect rewards monthly, while others give rewards once a year.
  • Annual rewards can help your financial situation more than monthly ones.

The best thing about using credit cards is the opportunity to receive rewards for things you already planned to buy. In fact, over the last 11 months, I’ve racked up about $700 in cash back rewards on a card I use often. But I still don’t have access to that money. Rather, my credit card company makes it available to me every February. While some credit card users may not like a setup where they get an annual reward payment, to me it’s a pretty good thing.

The Advantage of Earning Annual Cash Back Rewards

Some credit cards allow you to continuously accumulate rewards and cash them out each month. And while there may be a minimum up for grabs depending on your card, you may, for example, have the option to get $40 cash here or $50 there.

Having that money available to you on a regular basis could help you with cash flow, especially if you find that you tend to be close to spending your entire paycheck at the end of the month. But I prefer an annual cash back reward for a great reason.

For my credit cards that reward me monthly, I tend to take that cash back and spend it. After all, $30 here and there won’t make much of a difference to my finances, so I often use that money for an extra takeout or gift for my kids. But when I get a refund of several hundred dollars, I’m more motivated to save it or put it to good use.

Take the $700 cash I’ve already accumulated. By February, I may have more than $750 based on my projected spending between now and then. That’s a good amount of money to put in my savings or brokerage account. Or you could take that money and put it towards a weekend trip later in the year. The point, however, is that I will by no means be tempted to spend $700 to $750 on a whim, whereas I am often tempted to spend my smaller rewards when I receive them monthly.

What is the best reward setup for you?

If you have a tendency to give in to impulse purchases, a credit card with an annual cash back reward may do a better job of helping you stay on track with your financial goals. That said, if your current credit cards allow you to collect your rewards monthly, you don’t have to. Instead, you can simply let your rewards roll in and then receive a big payout at the end of the year. Or, you can withdraw your cash every six months. There are different options to play.

The point is that an annual cash back reward may end up helping your finances more than a series of monthly rewards. And that’s something to keep in mind as you prepare to apply for your next credit card.

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