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
For some cards, the “cash back” is in the form of points, which you can only use for specific purchases made with the card. I have a travel card, for instance. So for every $100 I spend (on anything) I get points that can be used to refund me $2 on travel expenses. Every two or three months, I log in it shows me a list of “travel expenses” which is pretty broad. Suppose I have $200 worth of points built up (from $10,000 of spending on my card). Two months ago I stayed in a motel and it cost over $200. I click that and my points balance goes to zero and my payment due drops by $200.
Depending on your lifestyle and means, this can basically generate a 2% discount on everything you buy. I use my credit card for everything. I don’t travel a huge amount, but there’s enough stuff that counts as travel that I can basically always find something to convert the points.
Two interesting anecdotes:
Years ago I worked at a small company that had to buy very expensive items (~ $10,000) every few weeks on behalf of the US govt. We’d buy them and then bill the government, and get paid in a few weeks. — guaranteed. I and one other senior guy just kept bumping our credit limits up and did all the buying on our personal credit cards. I probably spent $200,000 per year on that stuff. I usually got my money back before the next credit card bill, so I could always pay the credit card balance down to zero, so I never paid interest. But I got 2% of $200,000 = $4,000 in credits.
Second anecdote: I bought a car recently. They were careful to explain that if I used my credit card to buy it, they would tack on a 5% processing fee to prevent that kind of loophole where I get a 2% discount because the bank charged them 5% for the transaction.
Latest Answers