There are several types of credit card rewards, but only one of them credits cash in your bank account. In this article, we explain what is cash back on a credit card.
With inflation at a 40-year high in the US, it is no surprise that the average American household is bearing the brunt. At such a time, cash back rewards are incredibly appealing to customers. They allow customers to get a portion of the money they spend back as credit.
There are various types of credit card rewards, and they can be incredibly confusing. This article tells you a bit more about how cash back and rewards cards work.
What is cash back?
As the term suggests, cash back is a deal offered to you by card companies, where you get a portion of the amount you spend for a product or service back.
While most credit card companies make it confusing for their customers to use their cash back, that’s not the case at Vital. Here, we give you unlimited 1.5% cash back on all spending.
There is also the opportunity to increase your cash back earnings to 2% with 5 successful referrals and 3% with 10 successful referrals on a monthly recurring cycle program. A successful referral is someone you invite to Vital who goes on to be approved for a Vital Card. Learn more about cash back rewards at Vital Card.
How cash-back rewards are useful
Cash back rewards on credit cards can be directly deposited in the bank account, deducted from the statement balance you pay at the end of a cycle, or given as a gift card. Cash back offers are also available on some debit card transactions. Here, cardholders receive cash directly into their bank account.
The purpose of cash back is to incentivize existing and new customers to use their credit cards and spend more money while allowing them to earn some money back. On most credit cards, the amount of cash back you receive on a transaction depends on the type of purchase and the transaction level.
For example, a consumer may receive a 2% cash back on grocery expenses and 1% on any other type of expense. Of course, this varies among most companies, but that’s why we’re here – to remove the ambiguity and help our members earn while spending responsibly.
Typically, the cardholder has to reach a particular ‘transaction level’ or spend a specific amount of money before qualifying for cash back rewards.
This amount changes depending on the type of card and the card company. Some card companies also offer cash backs on specific purchases only, like travel or electronics, so always read the fine print and pick an offer that suits you best.
How cash back works
Card companies can provide these cash back rewards because they can deduct this amount from the transaction fee that they charge shops.
Shops or merchants must pay an interchange fee for each payment you make using your credit card. If you make a payment of $100, the merchant receives about $97, and the $3 is retained by the card company. So, essentially, the card companies aren’t giving you the cash back from their pocket; they’re only giving you back part of the merchant fee.
The card companies still profit, even after offering cash back offers. For example, if you purchase a TV worth $500 on a 1.5% cash back card, you get $7.5 back.
For this transaction, the merchant fee would be about $15.
Card companies often partner with retail sites like Amazon or Target to offer cash back purchases. This way, the incentive of cash back enables you to use both the app/retail site and the credit card that’s giving you the cash back benefit.
Many cards also change up their offers according to the season. So, for example, there would be a cash back offer on holiday items around Christmas and for electronics during Cyber Monday.
How to use your cash-back bonus
Most cards give you several options to choose from to redeem your cash back reward.
For example, let’s assume you have a cash back offer of 1.5% on a purchase of $1,000. You are entitled to $15 of cash back. The most common redemption options for this reward are:
Statement credit: You can use that $15 to pay off part of your statement balance for that month.
Charitable donation: Some card issuers will let you transfer your cash back bonus to a charity of your choice.
Buy a gift card: Your card company may let you use the cumulative cash back you receive to purchase gift cards for select retailers—and some might even offer an extra incentive.
Make an online purchase: Some card issuers partner with retail sites to let you use your cash back bonus when making an online purchase.
It’s a good idea to check with your card provider to learn all the redemption opportunities available to you.
What are the terms and conditions of cash back?
It’s important to note that the terms and conditions applicable for your cash back offer can vary depending on your card company and how you choose to redeem your cash back.
For example, you can make a charitable donation with $15 cash back, but you might need a cumulative cash back of at least $25 to get a gift card.
Depending on the card issuer, some cash back rewards may only be valid for a limited period. Unfortunately, there’s no industry standard for cash back rules, so it’s a good idea to look through the fine print for the details of your cash back offer.
You can also check with your card issuer to understand when your cash back expires. You lose any pending cash back offers if you close your account.
Basic facts about cash-back rewards
Compared to air miles and lounge access benefits that only appeal to someone who travels frequently, cash back rewards are particularly helpful because they aren’t restricted to spending certain things.
If you shop online for $100 and get $3 back, you’re spending $97. The reward is very flexible, and you can choose to spend this cash on any other purchase you want to make or even on daily necessities.
Cash back websites also often offer discounts on products for customers who use their cards, along with cash back rewards.
For example, 30% off on shampoos for X credit card users, along with the cash back offer. If your credit card company is tied up with the shopping sites you frequently use, it can save you a decent amount of money.
Credit cards with cash back also often have a sign-up cash back bonus. These rewards are an easy way to earn back some cash while you shop.
As for the cons, credit card companies usually put a cap on how much cash back you can receive per quarter or year.
Vital is a credit card company that offers unlimited cash back rewards.
Another downside of most credit cards — especially cash-back credit cards — is that they may have high annual percentage rates (APRs). This means that if you default in paying your statement balance in full before the due date, you are charged a higher interest rate.
You may also lose your earned rewards if you don’t pay your bills on time. If you carry a balance on your credit card month to month, even the most generous rewards program will be nullified by the amount you are paying in interest.
What should you know before signing up for a cash-back credit card?
Before you sign up for a cash back card, spend some time analyzing your spending habits. Do you dine out often? Does your grocery bill outweigh your other expenses? Are you a frequent traveler? Which online site do you shop from the most?
Once you understand your spending patterns, pick a card that fits your lifestyle needs so that you can maximize its rewards.
Cash back rewards are a great way to make money while shopping. When choosing a card, compare the annual fees and interest rates and the cash back reward and the redemption options.
If you are particular about paying your statement balances before the due date, you can avoid paying interest and get the most out of cash back credit cards.
If you consider getting a cash back credit card, we highly recommend Vital. Vital is the credit card that pays you to share and spend responsibly.
Sources
“Consumer Price Index,” U.S. Bureau of Labor Statistics
“Types of Rewards Credit Cards,” Bankrate.com
“Personal Finance,” Investopedia
Vital Card blog posts are intended for informational purposes only and should not be considered financial or any other type of advice.