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?
In: 5
It means you spend $200 and then you get a “cash back” reward that’s typically 1-2% of purchase amount, so a reward of like $2-4. Basically, credit card companies charge retailers about 3% to process transactions, then give a portion of that back to customers as a loyalty program.
Some people make a big deal of it, but the reality is would you be super excited if you walked into a store that was offering a 1% off sale? I mean it’s better than nothing, but it’s still not a lot of money.
You have a 2% cash back card. You spend $100 on your credit card. The credit card company puts $2 into a little account for you to redeem later.
They can do this because it encourages you to use your card more, and they charge the store a fee to process the payment, probably around 3%. There is also a percentage of people who will not pay it off, and have to pay interest at anywhere from like 5-25%, so cash back cards are really only good for financially sound and responsible card users.
A credit card company makes money by charging stores to take credit cards, and by charging people to use credit cards.
If you’re a good customer, the credit card company might give you back a bit of of the money that they’ve collected. The amount, depends on how much you bought. Buy more, and they give you more. That rewards you for using your credit card (which is how they make money), possibly getting you to use it more often.
You’ll never get as much back as they made off you, but the little amount you get is better than nothing.
The customers of credit card companies are not the cardholders like you and me. The customers are the businesses you buy things at. It’s why certain businesses may take some kinds of cards but not others, or none at all. The ability to swipe a card at a store is a service that the stores have to pay for.
From the credit card company’s perspective, they have a service that they need to sell to stores. To be attractive to stores, they need their service to be worth it. They do this by trying to create as many regular users of their cards as possible. If they have a lot of users, the card company can roll up to stores and say, “Wow, look at all these people who want to pay for things with our cards, it’d be a shame if they didn’t want to shop at your store because they couldn’t swipe them here…”
To entice you to use their cards and prop up their numbers, the credit card company will shower you in loyalty gifts. This often takes the form of cash back, where the credit card company essentially is paying you to use their card to buy things. For every dollar you spend, they will pay X% of that purchase back to you.
Let’s say you get 2% cash back.
You buy something for $100 in a store.
You don’t use the card again.
The bill comes in the mail for $100.
You pay the $100.
You then get $2 in rewards that usually can be used for paying your bill off but some places can accept it (example Amazon) directly.
The credit card literally gives you money back because they make money when you use the card. Credit card companies charge stores and businesses to accept credit cards.
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