And what is the difference between cashback for credit vs debit cards?
Edit: I believe I mean cashback rewards
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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.
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.
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.
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.
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.
When you buy $100 worth of groceries with a $100 bill, the store gets $100.
When you buy $100 worth of groceries with a credit card, you pay the credit card company $100, and the credit card company sends the store $97 and keeps $3.
If your credit card offers “rewards” / “cash back”, the credit card company gives you $1 and keeps $2 instead.
When you buy $100 worth of groceries with a $100 bill, the store gets $100.
When you buy $100 worth of groceries with a credit card, you pay the credit card company $100, and the credit card company sends the store $97 and keeps $3.
If your credit card offers “rewards” / “cash back”, the credit card company gives you $1 and keeps $2 instead.
When you buy $100 worth of groceries with a $100 bill, the store gets $100.
When you buy $100 worth of groceries with a credit card, you pay the credit card company $100, and the credit card company sends the store $97 and keeps $3.
If your credit card offers “rewards” / “cash back”, the credit card company gives you $1 and keeps $2 instead.
When you buy $50 worth of stuff at the store, the credit card company only pays the store something like $47 to $49 dollars (depending on their agreement with the merchant, sales volume, chargebacks, and other factors). From that $1-$3 the card pays you something like $0.50 to incentivize you to use the card more.
When you buy $50 worth of stuff at the store, the credit card company only pays the store something like $47 to $49 dollars (depending on their agreement with the merchant, sales volume, chargebacks, and other factors). From that $1-$3 the card pays you something like $0.50 to incentivize you to use the card more.
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