Cashback credit cards sit among a collection of rewards-based credit cards that have become increasingly popular in recent years.
Gone are the days when a credit card was just a credit card. Nowadays, you can have a credit card for all kinds of things. Travel, rewards, bonus cards, and low-interest credit cards, it’s a growing list of credit cards that all offer different advantages.
Cashback cards fall into this group as well, their advantage – as you might have guessed from the name – is to give you a percentage of cashback on every purchase you make. However, there are a bunch of stipulations involved in this process.
Let’s take a closer look at what a cashback credit card really offers.
Why Do Banks Offer Cashback?
To put it simply, banks offer cash back because it will make them more money in the long run. If it attracts you to them as a customer, then it is more than worth the cost. They will make more money on you as a customer than you will make from them in cashback.
To start out, it’s not really the card company that is paying you the cash. The merchant from whom you are buying your goods or services provides pays the cashback.
For example, you walk into your favorite clothing store and pay for a nice $100 pair of jeans. The shop owner now has to pay the card company an interchange fee for using their card service. This interchange fee is usually around 3%.
So with the jeans, the bank will be given $3 by the merchant who sold them. With a cash back rewards card you will be given some of this fee back. If you have a 1% payback rate you get $1, 2% cards get $2 etc.
If you are wondering whether it is worth the card company’s trouble to run this service, the answer is yes. Cardholders are regularly purchasing things of much greater value than $100. A $1000 TV, for example, will make the card company $10. Now imagine millions of people across the world spending thousands of dollars a month…it gets quite profitable after a while.
How Does Cashback Work For Me?
As we mentioned above, a cashback card works by returning you between 1 and 2 % of your purchase fee. Essentially, they save you money. The exact percentage of payback will depend on the card you choose.
When choosing your cashback card there are several considerations you need to make. Let’s look closer at what these considerations are.
Getting the Cashback Card
You will only be eligible for most cashback cards with a great credit score. You should check out in advance whether a card is offering the kind of rewards you will really benefit from.
Certain cards offer a great sign-up bonus but a smaller percentage of cashback. However, it is better to select a card for its percentage of cashback than the initial sign-up bonus.
Are There Any Fees for a Cashback Card?
The majority of cashback cards come with annual fees, and these fees are not necessarily as good or bad as they may seem. As with the sign-up bonuses, fees can either look good or bad in their own right but it is really about how the card works in the long run that matters.
So, if one card has a no annual fee but only offers 1% cashback, and another card has a $100 annual fee but offers 2% cashback then perhaps the $100 card will make you more money in the long run.
It will depend on how often you spend with the card and the type of rewards the card is offering. The point is that there are calculations to be made based on your spending and not to pick a card based on the face value offering.
Other fees to be wary of are late payment fees and foreign transaction fees. Here you want to make sure these fees are not excessively bigger than the industry average.
Are there Rules to Cashback?
On the surface, it is very simple, once you start spending on your card you are awarded points that are then converted into cash. However, there are many different stipulations that the card companies put in place. Let’s look at the main ones now.
- Cards carry a limit of how many points can be earned in certain time periods – usually a month. So, for example, once you hit 2000 points in the month you will have to wait for the next month to roll around to start making points again.
- Some cards do not pay back in cash but offer other types of rewards that carry a cash value.
- Cards will offer better deals on certain spending categories such as gas, groceries, and restaurants for example. So, spending $100 on gas will get you more points than spending $100 on chocolate…unless you buy it at the gas station (it gets complicated).
- Rewards may only be limited to specific stores. For example, you might be able to get great rewards on gas but only if you buy it at one gas station and not their rival.
- The card may also offer promotions that are only temporary so you need to be aware of promotions ending.
What is a good cash back APR?
APR stands for Annual Percentage Rate. It is the amount of interest you will pay should you not pay back your monthly balance on time.
Firstly, if you pay your credit card on time – which is always well-advised – you won’t have to worry about this figure. However, there are many reasons you might not pay on time – if so, you will pay interest on the money you have used.
To be frank, there is no point in having a cashback card if you are not going to pay the balance in full each month because any savings you make will be lost and then some. The annual percentage rate you pay on cashback cards is usually higher than on a regular credit card.
Many companies will offer a 0% interest rate for the first year or so. After that, you will pay somewhere between 12-28% should you miss your payment.
Finding the best APR available is not a terrible idea but it is trumped by the idea of never missing a payment in the first place.
Payback Rates
There are several ways cashback rates are structured which we will get into now.
- Flat rate – these cards give the same percentage of cashback on every type of purchase
- Different rates – some categories of spending are given a different payback rate than others. So you might get 1% payback on everything except gas, groceries, and travel, where you will get a 3% payback for example.
Flat-rate cards are obviously easier to keep track of, but different rate cards could prove to be much more lucrative. However, different rate cards -especially the ones that are changing their rewards categories- can be difficult to keep track of.
How Do I get My Cashback?
There are a multitude of ways to get your cashback rewards paid back to you. You can get it put into your checking account, back onto your credit card, or mailed to you by cheque. You can even have your money paid back in vouchers for other stores, or donated to charity.
Whatever you decide you should find out whether or not there is a time limit to use your points. Some cards issue expiry dates on your points so you have to use them by a certain time or they are lost.
Recap
So that’s the lay of the land, and in all honesty there are minimal gains to be made. If you spend a lot of money and pay it back on time then you could prosper with a cashback credit card.
Most of us spend thousands every month, some people more, some people less, so there are definitely points to be earned by getting this type of card. Before you start earning though you should ask yourself a few questions:
What do I usually spend my money on, and how much will this card give me in return?
In general, these cards can only hurt if you mismanage them – but then again, the rewards they offer are not life changing at all – insignificant on your overall budget.
The best cashback card is the one that fits in very specifically with your spending habits, and the one you are willing to monitor frequently.
