Like when a card says it offers a percentage of cash back
Wth does that even mean? If I borrow 200$, then I pay back 200$ or more, so what is cash back?
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You get given money for using your credit card. So if it’s 1% cashback you would get given $1 for every $100 you spend
Spend money on qualified purchases and get a certain percentage back. I run our business off mine, pay it off every month. I get thousands back in rewards every year. It shows up on my statement and can be applied to the bill or spent as usual.
For every x dollars you borrow from them, they reward you with y% of x dollars.
This means that if you spend $100 at a restaurant that your card issuer does 5% cash back at, you’ll receive a reward balance of $5.
With Credit Cards they charge the places you buy stuff a fee. Can be anywhere from 0% to 10% on whatever you buy. This is where the CC companies make their money, assuming you pay off your CC every month (or you pay interest).
To get you to use your CC more these companies are now offering you a percentage of the fee they take from the store. So let’s say they charge 5% to the store to use their CC machine, and give you back 2%. On a $100 charge the store gets $95, you get $2 and the CC company gets $3.
For most credit cards it is done with a point system.
For example, if you spend $300 you get 3 points.
Sometimes they give you more points depending on what you purchase. They will usually advertise this, but for example, restaurants and gas are usually at a higher percent.
Once you earn a certain amount of points, you can redeem them for “cash” and apply it to your balance.
Example: 500 points = $5.00, which is then subtracted from your credit card balance.
Also good to note that if you pay off your balance every month, rewards CCs are free money. Put my gas purchase on my CC and I get 3% back- Not enough to offset inflation, but that’s $1.50 every time I spend $50 on gas, which is more than I’d have otherwise.
This is very contingent on not carrying a balance, ever. But if you’re responsible, you’ll get some amounts of free money on things you were already gonna buy anyways.
A percentage of your total spending each month turns into a cash back reward.
I get 3% cash back and each month I get around $20 which I apply to my credit card statement.
It’s a system designed to make you feel (slightly) better about spending too much with your credit card.
Credit card companies charge fees to the merchant for every purchase, typically in the range of 4-5%. This is why some merchants charge extra if you use a card, most commonly known are gas stations. What this means is that, if you charge $200, the merchant gets around $190, the card company gets $10, and you pay $200.
In order to encourage their customers to use their cards, and thus get the company those fees, many card companies will offer various rewards. A common one is “cash back” where the company will pay the customer a percentage of their qualifying purchases. Another common one is points towards flights or other items.
If the company gives 1% cash back, the merchant gets $190, the card company gets $9, and you effectively pay back $199.
In a cash back, instead of a point system, you earn credit with every purchase. Sometimes more on some items than others. Say you get 2% cash back on groceries, and %3 cash back on entertainment. If you buy $100 worth of groceries, they’ll put $2 in your cash back rewards. Then you spend $100 on a restaurant, they give you $3 in your cash back rewards. Now you have $5 in rewards. So you borrowed $200, but only have to pay back $195 if you want.
You can choose if they give you the money, or if they apply it to your balance, or it can be used towards a purchase sometimes – for instance, I can fully or partially pay using that balance at some vendors with my credit card rewards.
It’s basically a bribe to get you to use your credit card to pay for everything, since they make money on each transaction. It’s advantageous to you if you pay off that bill every month.
My Costco Citi card pays me 1-2k$ every year just for using the card to pay for something I would have bought with cash anyway, all the while getting $0 in credit card interest.
It’s free money, brought to you by the people who are not as responsible with their credit.
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