What is cashback and how does it work?


And what is the difference between cashback for credit vs debit cards?

Edit: I believe I mean cashback rewards

In: 0

Are you talking about Cashback rewards? Or the ability to pay $50 on a $30 item and get a $20 bill to put in your wallet?

When you swipe your credit card at a store, the merchant (business, shop) has to pay a transaction fee to the credit card company. The fees are so high that the credit card company can offer you a portion of that as an incentive for you to use their card more often.

That incentive or reward can be in the form of points you can redeem for travel, gift cards, items, etc. Or you can apply it as “cashback”, which usually means it goes towards paying off your balance. If you have no balance it can be applied as a credit on your account for future use, or sometimes cashed out to your bank account.

Debit cards typically don’t offer this since it’s tied directly to your bank account and often not processed as a credit card… and even when it is processed as a credit card you’re not getting anything back, just because that’s how the system is.

It might be confusing because terms are awkward.

There’s one form where you use a debit card, buy something for $19, pay $39, and get $20 back as “cash back”. This is sort of like bundling a purchase with an ATM visit, let’s ignore this because that’s not what you’re asking about.

You know how bulk purchasing makes things cheaper? Like the difference between buying 1 banana from a grocery store vs. buying 400 bananas as Sam’s Club gets your a lower per-banana cost? In this case, the bulk buyer isn’t you, it’s the bank/credit company.

They make a deal with the store and say if you let people use our credit/debit cards, we’ll pay you 95 cents for every dollar the custom spends. There are various reasons why a store might take this deal, but let’s agree they’ll accept it.

The credit card company or the bank will pay the store 95 cents per dollar, then charge you the full dollar, and pocket the 5 cents difference and that’s how they make money.

But the credit card or bank wants you to use *their* card to make the purchase and not Bank X’s card, or credit company Y’s card. So they say, fuck it, we’ll give you back 2 cents, we’ll pocket 3 cents, and we both make out so that’s nice right?

That’s basically the deal, they are negotiating a lower “bulk” rate from the store, and instead of pocketing it, offering you a portion of it as “cash back” as an incentive for you use their card and not someone else’s.

Cash back is basically exactly what it sounds like: the bank pays you for using the card. For credit cards, this will typically be applied against the balance you owe on the credit card; for debit cards, it will typically be a deposit made to your linked account.

The money they pay you will be a portion of the fees the bank charges the merchants you purchase from. These fees are why many businesses charge more if you use a credit card to pay. If the card has an annual fee, you pay interest, or any other fees, part of that money will go to fund the cash back incentives.

The same ideas apply to cards which give airline miles or use a more generic point system instead.

Cashback is important. It’s why you don’t pay taxes on it.

Many banks will pay you money for opening a new account with them. What they don’t tell you is that this will be reported to the IRS and you will owe taxes on the money they gave you. The IRS treats this money as interest.

With credit card bonuses (signup or cash back) the IRS treats this money as a discount on the item you are buying. A discount is not a taxable event so you will not get a 1099-INT for it. The sign up bonuses for credit cards almost always have a minimum purchase to receive the sign up bonus (and although the reward can be substantial) it will be less than the minimum spend.