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.
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.
Let’s say you spent $100 on your credit card.
Most rewards average 1.5%. You earned $1.50 in cash back whenever you want to redeem it.
The credit card company charged the merchant 3% since they are using their services (accepting their credit cards). They get $3 from the merchant and this allows them to give you $1.50 from earlier.
The other part and most important part is the interest on the credit card. Let’s say it’s 20% APR. Divide that by 12 then multiple that by the balance. If you don’t pay the balance of the card before it starts to accrue interest the $100 becomes $101.66 eating your rewards you thought you gained.
Let’s say you spent $100 on your credit card.
Most rewards average 1.5%. You earned $1.50 in cash back whenever you want to redeem it.
The credit card company charged the merchant 3% since they are using their services (accepting their credit cards). They get $3 from the merchant and this allows them to give you $1.50 from earlier.
The other part and most important part is the interest on the credit card. Let’s say it’s 20% APR. Divide that by 12 then multiple that by the balance. If you don’t pay the balance of the card before it starts to accrue interest the $100 becomes $101.66 eating your rewards you thought you gained.
Credit card companies charge stores a percentage when they use the network.
So If you spend $10 at target for an item target will only get like $8 for that item.
The credit card company keeps the $2.
So what do they do to make you want to use your credit card instead of cash? They give you $1 and keep the other $1.
This scenario is 1% Cashback. Some cards do more or less. Some have bonuses on different stores for different times. But it’s literally how it works
Credit card companies charge stores a percentage when they use the network.
So If you spend $10 at target for an item target will only get like $8 for that item.
The credit card company keeps the $2.
So what do they do to make you want to use your credit card instead of cash? They give you $1 and keep the other $1.
This scenario is 1% Cashback. Some cards do more or less. Some have bonuses on different stores for different times. But it’s literally how it works
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