Cashback credit cards what are they and how do they work
Cashback credit cards what are they and how do they work

Cashback credit cards: what are they and how do they work?

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Cashback credit cards and how do they work: What could be better than recovering some of the money you spend daily on your credit card? That certainly is a great idea, and that is exactly what cash back cards offer, which is why they are so appealing to some consumers. What are cashback credit cards and how do they work? Let’s find out below:

Roman Shteyn, owner and CEO of RewardExpert.com, says that the main benefit of cashback cards is simplicity. You don’t have to think too hard about how much you’re earning with this card, and it’s simple to redeem, so most people just deduct their money back from their account balance or redeem it for gift cards.”

Cash back cards include bonus category cards, tiered rewards cards, and fixed percentage cash back cards.

 While a fixed-percentage cash back credit card does not require much effort, a tiered rewards card or bonus category card offers more rewards but requires more effort to maximize cash back.

What is a credit card with cashback?

CASHBACK means money back. Essentially, it is a way for people who make purchases to get a portion of their money back.

Cashback credit cards are often questioned about how they work. It’s a credit card that pays you back every time you use it. As an example, if you have a card with a 2% cashback and you use it to purchase a laptop for 1,200 euros, it returns 24 euros for the purchase. There are some cards that have a flat rate and return the same percentage for all purchases;
Other cards give you a cashback bonus if you make certain purchases in a certain period of time, allowing you to get a larger refund.

What is the process? Several banks and credit or debit card issuers return a percentage of purchases made with their cards in certain stores to their users. American Express, Chase, and Bank Falabella offer some of the best-known cashback cards.

However, you might wonder how that money is returned to the user. Here are two possibilities:

  • In money: This is the most commonly used formula. When the conditions of the promotion are met, the cardholder receives a credit in his account at the end of each month corresponding to a percentage of the purchases he made during the preceding period.
  • In gift vouchers: Sometimes, financial institutions return money to users in the form of gift vouchers or gift cards. Typically, these checks are redeemed through purchases made in a certain store, either physical or virtual (like the famous Amazon gift cards).

In most cases, card issuers can provide this benefit to their users by signing strategic agreements with the vendors directly. The system is simple: The store offers the card issuer a discount, for example, 5%, on all purchases made with the card in the store. The card issuer will advertise the store and increase its sales this way. Lastly, the 5% discount applied by the store to the financial institution is returned to the user in the form of cashback, completely or partially.

Sometimes, the user himself selects, from a list of businesses, which business he wants to receive cashback from, based on his preferences. You can even design tailor-made cashback programs this way.

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Cashback Bank Falabella

Clients of Banco Falabella have access to several cashback options through the CRM bank card (up to $50,000 per month credited to CRM or CRM Black credit cards). You can take advantage of the following offers:

  • Refund of 10% of your gasoline purchases (maximum of $50,000 per month) You must subscribe to CLUB CMR BENEFICIOS GASOLINA, which will cost you $5,000 monthly. We recommend that you review the terms and conditions before activating this benefit as there may be a cost associated with it
  • 10% of your restaurant purchases will be refunded: Accumulate cashback up to a maximum of $50,000 per month. Your card will be charged $5,000 per month to activate it. Does not include purchases at supermarket-owned food establishments or cafeterias.

What is cashback in Rappi

You can also get money back with the Rappi credit card when you make purchases in certain categories.

  • Rappi Travel offers 5% cashback on plane tickets, hotel reservations and car rentals. By paying with RappiCard, you can receive $42,145 Cashback on a $842,900 flight to Miami.
  • For all other purchases, you will receive 1% cashback.

Cashback is given in three ways:

  • Convert it to Rappicréditos
  • Redeem them for Lifemiles miles
  • Credit balance to your account/bank

Keep in mind that the cashback applies to the RappiCard credit card and not to the RappiPay debit card.

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What is Loyal cashback

Leal is a platform where you can save on your purchases, win prizes and receive special offers in Colombia. Soon, you will be able to obtain a loyalty cashback credit card that allows you to save up to 20% on your purchases.

In the Leal app, you can also explore many brands that offer online cashback. The only thing you have to do is find a brand that offers cashback in the app, make a purchase in an allied store, and you will receive the cashback in “Loyal Coins”.

Here are a few brands or businesses where you can save:

  • Netflix
  • Spotify
  • Uber Eats
  • Buffalo wings

You can find many options on the market that offer you this benefit. We recommend that you know your spending habits before you choose a card and start the registration process. For example, some cards offer cash back on travel. Others reward you for shopping at certain merchants. Offerings that are tailored to the buying habits you already have will benefit you more.

Check the terms and conditions (establishments and types of purchases for which refunds are applicable), maximum accumulation limits per month, and other variables such as interest rates and handling fees.

The cashback bonus: How to use it

Depending on your card, you can redeem your reimbursement bonus or cashback by adding it to your credit card balance, requesting a check or a bank transfer or converting it into points. The money appears directly in your bank account when you receive an automatic refund. Several companies offer a cashback match program, which means that they double your refund when you earn bonuses.
With Enel X Financial Services, you can open an online bank account that includes a card and an Italian IBAN. Users can then make payments in real time, and it provides a cashback service as well.

What are cash back credit cards and how do they work?

Cash back credit cards reimburse you a percentage of your purchases.

Merchants pay interchange fees on every transaction, so card issuers can afford to pay cash back. “When you pay a merchant $100 with a credit card, the merchant only receives about $97,” says Daniel Mahoney, a certified financial planner in Atlanta.

If a TV costs $700, for example, you would get $14 if you used a 2% cash back card. On the merchant’s part, he would pay a transaction fee of about $21 when you used a credit card.

Cash back credit cards reimburse you a percentage of your purchases.

Merchants pay interchange fees on every transaction, so card issuers can afford to pay cash back. “When you pay a merchant $100 with a credit card, the merchant only receives about $97,” says Daniel Mahoney, a certified financial planner in Atlanta.

If a TV costs $700, for example, you would get $14 if you used a 2% cash back card. On the merchant’s part, he would pay a transaction fee of about $21 when you used a credit card.

“Some rewards or rebates may also be funded by a partner agreement between the credit card issuer and a specific merchant,” explains Mahoney. A good example is cash back earned through deals linked to a card.

With flat rate cash back credit cards, all purchases earn the same percentage of cash back. With category bonus cards and tier bonus cards, different types of spending earn different cash back amounts.

Merchant category codes are four-digit numbers that denote a type of business, such as a gas station or grocery store. Merchant category codes are used by credit card networks to categorize purchases and calculate cash back percentages.

Cardholders can redeem cash back as a statement credit or bank deposit, to purchase gift cards and merchandise, or to donate their rewards.

Check your card issuer’s rules regarding cash back amounts and options. Citi’s Costco Anywhere Visa® Card, for example, sends out rewards certificates annually in February.

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Why cash back credit cards? Consider interest rates 

Because bank interest rates are still so low (currently a savings account earns just 0.09% annual return) earning even 1% on each purchase beats bank interest rates. You can get even more cash back with cash back cards that offer 1.5%, 2% or higher on every purchase.

Unlike interest on your bank account, the money you receive is tax-free.

“Historically, credit card cashbacks have been viewed as a non-taxable refund of the purchase price, rather than taxable income,” says Mahoney.

You also earn money when you spend the cash back if it is loaded back onto the card, adds financial planner Andrew Feldman of Chicago. “It might be a fraction, but it’s a little more cash,” he says.

Another factor is that some cash back cards offer sign-up bonuses of $150 or $250, which means you get even more money for using the card.

Let’s explore the three types of cash back cards, and how to use them for maximum rewards.

3 Types of cash back cards

1. Category Bonus Cash Back Cards

  • Bonus category cash back cards offer 5% cash back on revolving spend. Cards with rotating bonus categories include Discover it® Cash Back, Discover it® Student Cash Back, and Chase Freedom.
  • If you are able to max out each spending category each quarter, then the 5% return can be a decent amount.
  • You have to sign up for the bonus categories every three months, and spending in the categories is capped at $1,500 per quarter. Since every purchase that is not in the bonus category earns 1%, you may not be getting the average return you think you are getting.
  • Chase Freedom cards and Discover cards have quarterly bonus tiers, which are usually announced a few months before the new quarter begins.
  • The US Bank Cash+ Visa Signature Card offers a variation on the rotating bonus category, where the cardholder chooses the bonus categories that will pay back the most money for the types of purchases they make most often.

2. Cash Back Cards With Tiered Rewards

  • To maximize your earnings, you must decide which card to use with each purchase in order to maximize your earnings. Tier reward cards offer more cash back on certain spending categories, just like tier bonus cards do.
  • For instance, the Blue Cash Preferred® Card from American Express offers 6% cash back at US supermarkets (up to $6,000 in purchases per year, then 1%), 3% cash back at US gas stations and 1% cash back on all other purchases.
  • For his business spending, Feldman uses his American Express SimplyCash Plus tiered rewards business card and for personal spending, he uses a Citi® Double Cash card, which offers a flat 2% discount (1% when you shop and 1% when you pay).
  • AmEx business cards reward 5% on cell phone service and office supply stores, 3% on gas (cardholders can select from eight categories for this tier), and 1% elsewhere.
  • Feldman compares the rewards he receives each year to the total amount he spends. He says the rewards are equal on average on both cards.
  • According to Feldman, American Express estimates a 2% fee, perhaps a little less. “I don’t spend enough on office supplies to exceed that 5%.”
  • Feldman asks, “Is it possible to get a few extra dollars back at the end of the year by using a credit card that targets each category of spending?” he says. “It is possible, but I have to think about which card to choose every time I make a purchase, and that would complicate my life.”

3. A simple cashback card

  • With simple cashback cards, also known as flat-rate cashback cards, you earn a fixed percentage on every purchase. You do not need to track and activate bonus categories. You earn cash back on every purchase.
  • Mahoney uses a credit card from Bank of America® Travel Rewards, which earns 1.5 points per dollar (effectively 1.5% cash back) plus a 75% bonus through the bank’s Preferred Rewards Platinum Honors program.
  • Mahoney says that’s effectively 2,625% cash back. “The caveat is that the cash back should be used as reimbursement for ride purchases, but many things count, including Uber and Lyft.”
  • A 2% change is better than a 1.5% change, she says.
  • Furthermore, “I miss the convenience of being able to log in and get my rewards all at once or schedule it to automatically get $25 or $50,” he says. “I like to collect my points immediately so that I don’t forget about them.”
  • The Fidelity Rewards Visa and Citi Double Cash cash-back cards are favourites of frequent flier expert Gary Leff.
  • Fidelity Rewards Visa cardholders earn 2% on all purchases, but you must be a Fidelity account holder and have excellent credit to qualify.
  • Leff writes on the View from the Wing blog that most people won’t go above 2% cash back.

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What are cash back credit cards? How should we choose them?

You may be wondering which cash back credit cards are the most appropriate for you, now that you know what they are. This depends, mostly, on the use you intend to give them.

Cash back cards often offer bonus points for specific types of purchases or rotating bonus categories, but you have to use the right card at the right time and place. Not only will you have to monitor your account to see how purchases are classified, but you may also have to manually enrol each quarter to receive the benefit of certain cards.

The cards aren’t the best if you’re looking for an “easier” way to earn rewards. 

Plus, most tier and tier bonus cards only give you 1% cash back on general purchases. Unless you spend heavily in a card’s bonus categories, you may not maximize rewards on the majority of your spending.

A flat-rate card may offer a lower rewards rate in a specific category, such as groceries or gas, but it will allow you to earn additional rewards on general purchases that don’t fall into a specific category, increasing your overall cash back rate. That’s why you may want to combine a cash back card with a tier-based bonus card that matches your spending habits.
2% fixed percentage5% category bonus *6% Tiered Bonus**
$21,897*** at 2%$14,645 at 1% ($14.65)$16,596 at 1% ($16.59)
$6,000 at 5% ($300)$4,464 at 6% ($267.84)
$437.90 cash per year$314.65 cash per year$284.43 in cash back per year

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Profits

How does cashback benefit you? This benefit is obvious for the user. With certain cards available on the market, you can get a direct discount on certain products or services just for using them. A user is even more likely to perceive a benefit if the businesses included in the agreement also offer recurring purchases.

Cashback becomes a tool for e-commerce or the store featured in the list to acquire and monetize customers. Small discounts enable this company to increase its visibility among card users and “steal” sales from its main competitors. Basically, a cheap marketing campaign.

Finally, through cashback, the card issuer can gain a competitive edge in a highly competitive market. Cashback guarantees the transactionality of the cards, which is, after all, the main objective of those who sell them. In addition, it goes without saying that a user who uses a certain credit card regularly is much more likely to be tied to the entity and much more likely to acquire related products (cross-selling).

Cashback is sure to make its way into payment habits in the coming years. For all the advantages and benefits mentioned, it looks very promising.

You can also save money by downloading the Fintonic expense control app. Do you already use it? Download it now and take advantage of all its benefits, because you will learn how to organize expenses and accounts like never before.

Have you figured out Cashback credit cards: what are they and how do they work? By following the above steps it’s simple right? Feel free to comment if you have any doubts!