I don’t even know where to start with this: I don’t understand it at all.
It’s obviously not free money.
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The way cashback works is essentially a gamble on the part of the credit card companies. They know that people are prone to not think properly when confronted with long term vs short term financial issues. So what they do is they offer 2% cash back on all purchases of x category, 1% on all purchases of y category, and 3% on all purchases of z category.
You, the cardholder, see this, and think “oh cool, so I should use my card any time I’m shopping for those things so I basically get a discount”. So instead of just using your debit card, you use the credit card. So two things kick in at this point.
First, merchants are typically charged slightly more for credit than debit. So the increased volume means the card company is soaking more fees out of the merchant, which usually offsets the cash back amount.
Second, most cardholders are garbage at paying off their balance every month. So you’re eating interest fees. Interest rates are invariably higher on cards with rewards programs – usually calculated to a point that eliminates the benefits of the rewards program unless you pay your balance promptly every single month.
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