I’m researching to open my first proper card and still confused about how cash back works.
Say you buy a burger and get 2% cash back. Does it apply a 2% discount to the burger? Or do I earn 2% of the burger’s price?
Where does the money for the cash back come from? Does the cash back affect credit score?
In: Economics
You will accumulate 2% of what you pay on your account for that card.
You will log in and see a rewards section that says how much you’ve accumulated in rewards. It will sit there being added to as you use the card until you decide to apply it towards something the company lets you. What they let you spend the rewards on depends on the card. Just some examples:
* Put it towards your statement balance
* Buy gift cards through the company and they mail them to you (sometimes cheaper than buying in store)
* waste them on sweepstakes or chance at other “prizes” (please don’t do this)
* Pay for flights (if it’s a miles card)
Using it to pay down your statement balance basically turns the cash back into a discount.
The money comes from the card company to entice you to use the card. The card company makes money from the shops each time you swipe the card. So by giving you 2% cash back, they earn 3-4% from the shop.
Also the more you use the card, the better chance of you not paying the balance, and they earn money off you in interest.
Cash back does not effect credit scores and it’s not treated as taxable income since it’s restricted to that company and is not actual cash.
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