Eli5 What is meant by cashback on credit cards?


Eli5 What is meant by cashback on credit cards?

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Basically the company offers you a bonus that can be used to pay the balance on your card, or even send you a check in the mail

Credit card companies charge merchants a fee in order to process their transactions. The more you use your card, the more money that it makes for the credit card company. So they encourage you to use your card as much as possible, and one of the ways they do that is through rewards.

Cashback is a reward program where you get a percentage of your purchases in the form of cash. It might be something like for every $100 you spend on the card, you get $1 back.

Usually that term is used to indicate that a card gives the card holder a rebate on all spending or certain classes of spending in the form of cash. So if you spend $50.00 the card might accrue $0.50 or $1.00 or some similar amount in reward credit that you earn at the end of the month.

Credit card companies make their money by charging merchants a fee every time someone uses a card with them so they want to encourage people to use their credit cards. One of the ways they do that is with a “cash back reward”. It means that they take a percentage of the money you’re spending and return it to you. Since you’re getting money back, you’re encouraged to use your card more so you can get more money.

For example, say you’re buying a $100 video game (round numbers) and you’re using your credit card that has a 1% cash back program. That means that you spend $100 but at some point in the future, the credit card company will give you back $1 since $1 is 1% of $100.

When you get the money back depends on the rules for the program. Some give you a credit on your monthly statement. Some send you a check every month. Some only give you a check at the end of the year and only if you still have the card at that time. You have to make sure you read the rules to understand what percentage back you can get, what they give cash back for (i.e. some won’t give cash back for alcohol purchases), and when they give it back.

You buy something for $100, and if your card offers 1% back then you’ll see a rewards balance of $1.00 for that purchase in your account. Typically you can apply the rewards balances toward your bill, deposit them to your bank account, sometimes you can redeem them for gift cards or travel rewards.