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How Does Cash Back Work
9 Dec 2019

How Does Cash Back Work? An Overview

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In 1999, American Express created the very first “credit card for the rich.” Named the Centurion, the card required its cardholders to spend over 6 figures every year.

Every card comes with its own set of benefits.

With a frequent flyer credit card, you’ll generate air miles every time you spend. And some frequent flyer cardholders go to extreme lengths to fly as much as they can, for free.

For a cash back credit card, you’ll get a percentage back, in cash, from every purchase. But how does cash back work?

Does it go straight to your bank account? How do the credit card companies pay for it? What’s the smartest way to take advantage of cash back?

Get all the answers about a cash back credit card in this article!

What Is a Cash Back Credit Card?

A cash back credit card is pretty much what the name implies. You earn money back for every cent you spend.

Under a broader category, a cash back card is a type of rewards card.

There are many different rewards cards available, each with its own rewards system. With a Nordstrom card, you earn retail points for every dollar spent.

With any type of frequent flyers credit card, you’ll earn free miles with particular, if not all, purchases. With a traveler’s credit card, you’ll likely earn hotel and travel points.

Even though there are many different types of credit cards, cash back cards are one of the more popular choices. And it’s easy to get why; most people would choose cash over anything else.

Individuals are more likely to use and appreciate a card of any sort when they feel as though they’re reaping some reward in return. And what better way to do it than by giving some of their hard-earned money back?

How Does Cash Back on a Credit Card Work?

Every card works differently. For the most part, however, you’ll earn a percentage back off all your purchases using your cash back credit card.

Some options offer a 2% return on every purchase made, regardless of what it is.

Other options only pay a return on purchases pertaining to a specific category, like travel, food, or a particular retail store.

Another card might offer cash back on combined purchases of a specific price range.

The variety is reason enough to do your research before choosing a cash back credit card to ensure you pick one that you’ll benefit the most out of using.

Where Does the Money Come From?

Credit card companies make money. Otherwise, why would they be in business?

They get their revenue from 3 primary sources:

  • Fees
  • Interest
  • Interchange

Some card memberships require monthly or yearly fees. You’ll incur an additional fee if you borrow cash from your credit card, and interest rates are typically higher when you do.

Interest is the primary way in which credit card companies generate their revenue. It’s what you pay them to borrow money. But many companies offer a period of time without interest, and if you pay your debt by the end of the month, you won’t accrue any either.

Interchange is something most of us don’t know about or think of. Every time you use your credit card, the merchant pays to accept the payment. A part of that fee goes to your credit card issuer. Typically it’s between 1% to 3% of a purchase, which gets added to a flat fee.

So the way in which credit card companies pay some back to their cardholders is by using a little piece of their revenue.

How Can You Redeem Cash Back?

With most cards, there are a few different options as to how you can use your cash back. Each time you log in to your account, you’ll be able to watch as the funds grow.

Typically, you’ll get to choose between gift cards, direct deposit or a paper check, and a statement credit.

Gift Cards

Some cash rewards cards will offer to redeem your cash back rewards as gift cards for a long list of different brands and stores.

Paper Check or Direct Deposit

Depending on your card issuer, you should be able to log in and “redeem” your cash by getting a paper check in the mail or depositing it directly into your savings or checking account.

Some cards are linked with individual sites, like Amazon, so that you can use those rewards points directly toward new purchases.

Statement Credit

With a statement credit, your cash rewards will go directly to your credit card bill, hence lowering your overall balance.

What Are the Different Types of Cash Back Cards?

There are a few different types of cash back cards, and which one you choose should correlate with your spending habits and lifestyle.

The Flat Rate

Some cards offer a flat rate on every eligible purchase. That rate might be 2% on every single purchase made.

Many cardholders enjoy the simplicity of the flat rate card because they don’t have to worry about which card to use and when, as they earn a flat rate back on every single purchase.

The Bonus Categories

Some cards give cash back for specific bonus categories of the card. For example, one card might give 5% cash back on purchases made at any United States grocery stores, 3% back on public transportation, 2% back at gas stations, and 1% back from any other purchase made.

If you’re savvy and you plan your purchases, you can earn a pretty penny back on a card that offers bonus categories. You have to make sure you’re organized and keep track of what card to use where if you want to maximize your earnings.

The Rotating Categories

With a cash back card that offers rotating categories, you have to stay on top of the offer of the month to reap the rewards.

For example, you might have a card that provides 6% cash back on up to $2,000 in combined purchases when you activate specific categories (like restaurants or public transportation). Typically, the categories change every 3 months, and you can usually earn an additional 1% on other purchases.

You can earn a lot with these cards, but it’s on you to remember when to activate certain categories and where to use the card.

How To Make the Most of Your Cash Back Card

Some people maximize their rewards and get to make big purchases or travel to a new place, for free. There are a few tips that will help you enjoy your card to the fullest.

Pick a Card That’s Right for YOU

Someone who doesn’t want to travel shouldn’t carry a frequent flyer card. And someone who uses public transportation won’t benefit much from a gas rewards card.

That’s why it’s so essential for every individual to pick the card that’s right for them.

While you’re looking for one that’s right for you, try to find a deal that offers AT LEAST 1.5% back on all purchases.

Pay Your Essentials with a Credit Card

The more you spend, the more rewards you earn. But the way to earn even more is to use your cash back credit card for every purchase that you HAVE to make, whenever you can.

The power bill, your cell phone bill, internet, and tv subscriptions, your car lease, and any other utilities account for bills you have to pay each month.

When you use your cash back card to pay for things you’re going to spend on no matter what, the cash back is even more of a reward.

Use Your Card for Big Purchases

You might get a discount for paying a bigger bill, upfront. For example, you might opt to pay for a semester of school all at once, and earn a percentage back for paying upfront.

Whatever the purchase, if you’re planning on doing it anyway and there’s a chance at a hefty reward, use your credit card.

Think About First-Time Rewards

If you’re planning on traveling within the next year and a credit card offers you a frequent flyer bonus to start, sign up! It might even be able to pay for your next trip.

Take a look at other one-time rewards offers and determine if there are any you’ll benefit from.

For a more in-depth look at how to take full advantage using rewards cards, check out this post.

How Does Cash Back Work?

How does cash back work? It works by rewarding cardholders for the purchases they make, and by providing options that cater to many different lifestyles of cardholders.

If you choose the right card and plan your spending accordingly, you can earn a significant amount back.

Plus, if all you do is use it to pay for bills you have to pay for anyway, you’ll just be earning money on your monthly purchases!

Do you want to learn more about some of the best rewards cards? Compare these 5!

You can also find a credit card or get a loan here.