Cash back can be termed as a credit card benefit that refunds the cardholder’s account a small percentage of the sum spent on purchases.
Cash back is an incentive offered by the credit card issuing banks to the cardholders where a small percentage of the total amount spent on the credit card is given back.
The cashback may be awarded either in the form of cash, check, or credited to the credit card account. Let us take a look at how cashback can be beneficial for both you as well as your bank…
How can you benefit from cash back?
Cashback credit cards allow the cardholder to save a lot of money on daily expenditures as well as popular expense attractions. A cashback card is useful for the cardholder who regularly uses the credit card for purchases. By doing so, the customer earns back a certain percentage of the amount of transaction at every place the card is used. This cashback is then credited to the card holder’s account to be used at the pleasure of the customer. You can benefit from cashback in a number of ways, such as:
Cashback rewards are actual cash that can be applied to a credit card bill or received as a check or bank account deposit. Since cashback cards provide rewards in the form of cash, such cards help increase cash flow in the hands of the cardholder which can then be used for personal expenses or to defray other credit card expenses.
Analyzing and maximizing cashback
Cashback rewards tend to be limited to certain categories of spends and have caps on the amount of cashback that can be earned. If you have analyzed your spending patterns well, you can actually go in for multiple cashback cards. This way you can earn more cashback than is possible with just one card.
Easier to redeem than rewards points
To put it very simply, it is easier to get a cashback than redeem rewards points for gifts. This is because to redeem something really worthwhile one must have accumulated a fairly high number of points, i.e, one must have spent quite a bit. Cashback is available at lesser spends and one gets to see the benefit in the form of cash, making them seem like the better option.
Applicable on supplementary cards
The benefits of cashback need not be restricted to you. You can get supplementary cards issued and share these benefits with your family members too. As the amount spent on the applicable categories (from both the principal and supplementary cards) increases, cashback rewards get maximized as well.
Purchase and travel insurance, extended warranties, discounts, deals and offers against a range of shopping and entertainment options are some of the numerous benefits, offered both by credit card issuers and card brands like Visa and Mastercard, accompanying cashback credit cards.
How do credit card issuers benefit from cash back?
Since cashback programs are incentives for consumers to use their credit cards, they generate increased merchant fees for the credit card company. They can also cause some consumers to increase their debt and provide yet another source of revenue for the credit card company. And since cashback credit cards carry the subtle psychological incentive of earning money while you spend, people tend to spend even more on them than non-rewards cards. So, rather than draining corporate profits, cashback rewards programs actually significantly increase credit card companies’ bottom lines. Here are 5 ways how a cashback can be profitable for credit card companies:
Credit card companies are in the business of making money, yet they often advertise incentives that feature rewards such as cashback on credit card purchases. Many consumers are inundated with online offers and mailers, promising great incentives, from zero to low introductory interest rates to one-time bonus rewards offers, to cashback deals whenever they use their cards
The fine print
Before you are swayed by the cashback offered by a certain credit card, it is important to read the fine print. Because most consumers do not take the time to read the fine print, they may open a credit card account under the impression that cashback rewards programs are much more generous and universal than they actually are. Certain cards only offer cashback for certain categories of purchases, such as at restaurants or gas stations.
It is not free cash
When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. If the cardholder has a participating cash back rewards program, the credit card issuer simply shares some of the merchant fees with the consumer. The goal is to incentivize people to use their credit cards when making payments rather than cash or debit cards, which earns them no rewards. The more a consumer uses a credit card, the more merchant fees the credit card company can earn.
Most cash rewards programs have an annual maximum limit, so while they may offer a generous 5% cashback reward, there may be an annual cap or maximum limit you can reach. For example, with a credit card program with an AED 1,500 cashback limit per year at 5%, any spending over AED 30,000 would not contribute to accumulating any further cashback rewards.
Credit card companies make up for the money given through cashback by charging high-interest rates on credit and issuing late fees for balances that carry over from month to month. The more customers use their credit cards, the more likely it is that they will miss a payment or carry a balance for which they will owe fees and interest.
Cashback rewards sound enticing and they can help consumers save a bit on their credit card purchases. However, once the restrictions and qualifications are spelt out in the fine print, including any limitations on how much cashback credit card users can earn per year, these programs do not appear as generous as they may seem on the surface.