Image source: Getty Images
Costco has two different kinds of memberships you can choose from when you join the warehouse club. You could become a Gold Star member for $60 per year. Or you could spring for the upgraded Executive membership, which would mean $120 must come out of your bank account to cover the yearly membership fee.
One of the biggest benefits of signing up for the Executive membership is the annual reward. Specifically, Costco provides you with 2% back on most of your shopping (things like gas and the food court are excluded), up to a maximum of $1,000 back, when you choose the Executive membership.
While getting this money back is a pretty nice perk, it can also set you up for a mistake that could be damaging to your personal finances. Here's what it is.
Don't fall into this Costco trap if you become an Executive member
If you sign up for the Executive membership, one of the most common ways to justify the extra cost is to determine that you'll make back your $60 due to the 2% cash back. And, in fact, if you spend at least $3,000 a year in Costco purchases, you would get a $60 annual reward and the 2% back would fully cover the added cost of upgrading your membership.
The mistake, however, comes from feeling pressured to hit your $3,000 spending target to "get your money back." If you'd be left feeling like you wasted your cash by upgrading your membership if you didn't end up spending $3,000 a year at the club, your attempts to meet this milestone could lead you to spend more money at Costco than you otherwise would.
Sadly, spending more money to try to make back what you've already paid out is rarely a good idea -- and it probably isn't in this case either.
Don't overspend to justify your upgraded membership
Although getting 2% back is a nice bonus as an Executive member, the reality is that it's a really small percentage of what you're actually spending. So, if you're buying things you don't need just to make sure you get your $60 back in annual rewards, you're parting with a lot of funds for a pretty minimal reward.
Let's say, for example, you're getting near the end of the year and you look back and realize you've only spent $2,500 at Costco so far and you'll be getting just $50 back -- so you'd be $10 short of covering your upgraded membership fee. Sure, you could go spend the extra $500, but is it worth buying $500 of additional Costco products just to not "waste" $10? Probably not.
If you suspect that your spending choices will be influenced by a desire to get those rewards at any cost, then you probably should go with the basic Gold Star membership tier unless you have a long, proven track record of spending more than $3,000 annually at Costco. Otherwise, that $60 upgrade to the Executive membership tier could end up being a costly choice.
Also, keep in mind that Costco is known for its great return policy, which applies to the Costco Executive membership too. If you fall short of breaking even with the upgraded membership, Costco will refund you the difference. There really is no need to make an expensive mistake with your membership.
Alert: our top-rated cash back card now has 0% intro APR until 2025
This credit card is not just good – it’s so exceptional that our experts use it personally. It features a lengthy 0% intro APR period, a cash back rate of up to 5%, and all somehow for no annual fee! Click here to read our full review for free and apply in just 2 minutes.
We're firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. 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.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale. The Motley Fool has a disclosure policy.
