How does Cashback Work?

What is Cashback?

There are many credit cards today that offer cash back rewards, but what exactly is cashback. Cashback is an incentive program offered by credit card issuers where a percentage of the amount spent is paid back to the cardholders. Banks can afford to give cardholders cashback because merchants pay an interchange fee when someone pays with a credit card.  When you pay a store $100, the merchant only gets about $97. This allows the bank to give you back a certain percentage of purchases.

There are many different types of cashback credit cards, including flat-rate cashback cards, tiered rewards cashback cards, and rotating categories cashback cards. Understanding your spending habits can help you pick out a cashback card that will earn you the most money. 

Cashback Credit Cards

Cashback credit cards will offer cashback as a percentage of the purchases you make. For example, you can get 2% cashback on all purchases. Different credit cards will offer different cashback rates on different categories, so it is important to pick a cashback card that will earn you the most money. Unlike rewards, cashback can usually be redeemed on anything without restriction from the bank.

Some cashback cards have a restriction that has a cap on the number of purchases you can make. For example, earn 5% cashback on the first $1,500 in purchases, then earn 1% cashback on all other purchases. Depending on the credit card there could be spending limits for your cashback, so it is important to read the fine print of their cashback system to be fully aware. 

Ways to redeem Cashback

Cashback can be redeemed in a few different ways:

• Statement Credit: You can apply your cashback to outstanding credit card bills. This is an easy way to redeem your cashback and make your bills cheaper. 
• Bank Deposit: This is cashback that is earned and deposited directly into your bank account. There usually is a minimum cashback balance you need to redeem straight to your bank account, so it is important to check the terms and conditions. 
• Gift Cards: Some cashback programs allow you to redeem gift cards from popular retailers. Occasionally there would be deals on the gift cards, so it is important you check with your bank for different offers. 
• Charitable Donation: Some banks let you choose a charity of your choice and send your cashback there.

There are many ways to redeem your cashback and banks usually give you more freedom than traditional rewards programs.

The Right Cashback Card for you?

There are many factors you should consider when picking a cashback card. You need to fully understand your spending habits so that you can get higher cashback rates in categories you spend the most in. When picking a cashback card there are also more considerations such as fees and interest rates of the credit card. Many credit cards come with cashback and rewards but it is all up to which one is right for you.

Conclusion

Banks pay you cashback based on an interchange fee from merchants. That money is then distributed to you at a certain rate called cashback. There are many different categories of merchants that cashback applies to and also many different types of cashback credit cards. When picking a cashback credit card, it is important to consider all factors and what is most necessary for you.