Understanding Cashback Credit Cards

If you have your television on for more than about 10 minutes, there’s a credit card company offering cashback rewards for their clients. The question of course is how exactly does it work? Beyond that, is it the right option for you? We’ll explore cashback credit cards and give you some things to think about before signing up for one.

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How Does It Work?

There are multiple types of rewards with credit cards, but cashback credit cards are by far one of the most popular. This is mainly because they pay you back in cash-based rewards. Every time you use your credit card for an eligible purchase, which can vary widely from company to company, the credit card company will pay you a percentage of your purchase price back at the end of the statement period or billing cycle.

Most of these credit card companies pay somewhere between 1% and 2% of your purchase price back, but some pay as much 5%. So, let’s do some simple math here: if you spend $1,000 over the course of a month and receive 1% cash back, by the end of that month, the credit card company will give you back $10. Even some of the healthier 5% credit cards would only pay you back $50.

Why do credit card companies offer this service? They know you will more than likely run a balance, and any cash that they have to give you back, will be paltry in comparison to the interest you will pay over the next couple of years.

However, There Are Some Benefits

If you are a specific type of card user, cash back may make sense. If you are one of the people that pays off your credit card balance at the end of the month, the cash back perk can be quite beneficial. That’s because you are not paying interest anyway, so it’s like getting a discount on everything you buy. Unless you are going to pay off your credit card every month, the idea of getting cashback is simply a marketing tool. While you do get some of your purchase price back, if you are to receive $10 and end up paying $200 in interest over the next couple of years, did you really come out ahead? However, if you pay off your bills every month, it’s like getting a few percent off of some of the items you purchased.

Types of Cash Back Redemptions

If you find yourself in the category of people who are more likely to benefit from this program, there are handful of ways that these rewards are typically distributed. Most of the time, these cards will issue a statement credit. They simply take the money out of the cost of your purchase, when you redeem cashback rewards. Some are automatic, some are not. Either way, they work the same way.

There is also the possibility of getting a direct deposit or paper check, but this is a little less common. Also, it is a bit more cumbersome. There is also the possibility of redeeming your cash back for gift cards for your favorite stores, brands, or sometimes even MasterCard or Visa gift cards.

Various Types of Cards

There are various ways that cashback can be calculated. This is probably the simplest way to figure out your rewards, as they will offer a specific amount of cash back on purchases. For example, it might be 1.5%. This is the most common type of card and makes it much easier since you get the same reward rate no matter where you spend your money.

Some have bonus categories that will pay more. For example, you may get 5% cash back at US supermarkets up to a specific amount. Some will pay 3% at gas stations, and so on. While these bonus category related cards can save you more money, you have to keep tabs on where you are spending your money.

Lastly, there is also a rotating category cash back card. This is essentially a marketing scheme to get you to buy at specific places to earn some of your purchase price back. For example, you may have a credit card that offers 5% cash back at Macy’s, which is essentially a great thing if you plan on buying something from there to begin with but be advised that it is simply a way of Macy’s to advertise to you. These offers change quite often but can be useful if you are looking to go to a specific store anyway.

Final Thoughts

Cashback cards, in theory, can be a great thing. However, if you are going to carry a balance on your credit card, it really isn’t going to make much difference in the final outcome. In this category, it truly pays to pay off your balance monthly. If you have the discipline to do that, then you might as well take advantage of the discounts these cards offer. Also, make sure that there aren’t annual fees. Quite frankly, if you are going to get $100 back and pay $75 in annual fees, who really wins? Is it really worth the hassle for an extra $25?