How do cash back credit cards work?
Credit cards only work as hard as you. That’s why learning to use them the correct way makes such an impact in your life. Many believe credit cards are dangerous, but it’s the users who are dangerous. If you know how to use your credit card properly, you make it work for you rather than allowing it control of your life. Now is the time to learn how to make your credit card work for you to pay you for making everyday purchases. Everyone enjoys earning cash back for making everyday purchases. Learn how cash back credit cards work.
What is a Cash Back Credit Card?
Perhaps you already know what a cash back card is, and maybe you don’t. Many people are familiar with reward credit cards such as those that offer miles or hotel points for every dollar spent. Cash back cards work like this. Cash back credit cards offer you cash for every dollar you spend rather than miles or points. Most cash back cards offer 1% cash back for every dollar spent, but there are those that offer more. If you want to get paid to shop, this is the best way to go about earning a little money doing what you already do so well.
How do Cash Back Credit Cards Work?
There are several types of cash back cards on the market. Each is unique to its company and its own standards, but most work similarly. Each card company chooses a percentage of cash back to offer cardholders for each dollar they spend. One might offer 1% cash back for every dollar spent. Some offer 2% cash back, others offer 1.5% cash back. Some even offer cash back at a flat rate for most purchases and a much higher rate for other purchases.
For example, some cards offer rotating rewards programs in which each quarter a new set of stores are introduced. For that quarter, cardholders get 5% or 3% or 2% cash back on every dollar they spend at a location on that list. The list changes quarterly, and it usually includes locations such as gas stations, supermarkets, entertainment, and department stores. There is almost always a cap on the additional cash back you can earn. An offer might allow you to earn 5% cash back on all supermarket purchases up to $1,500 per quarter as an example. Chase Freedom is a prime example of this type of cash back card.
Some cards offer cash back in a unique manner, such as offering 1% cash back for every dollar spent and another 1% cash back on every dollar paid off each month. There are many cards to choose from. It’s finding the right cash back card that makes the difference for consumers.
Options for Redeeming Rewards for Cash Back Credit Cards
– Use cash back as a statement credit
– Ask for a check in the mail
– Direct deposit
– Buy gift cards with cash back
– Apply cash back toward your mortgage or student loans with some cards
Some credit card companies want you to have a minimum amount of cash back earned before you can claim it. Others do not.
How to Earn Cash Back
As discussed in the previous section, it’s spending money that allows you to earn cash back, but that’s not the only way to earn cash back. Depending on the cash back card you choose to carry, there are other ways to earn cash back. Many offer an upfront cash sign up bonus if you spend a certain amount of money in a specific amount of time. For example, a card company might offer you a chance to earn $100 cash back if you spend $500 on the card in the first three months the card is active.
Some cards offer to match the cash you earn at the end of your first year. If you spend $20,000 on your credit card throughout the year and earn $200 cash back, your card company will match that and provide you with an additional $200 cash back. Other companies allow you to add authorized users to your account. They give you a cash back bonus when that authorized user makes his or her first purchase with the card.
Most cards do not allow you to earn cash back on balance transfers. So cash back cards aren’t the best resource for those looking to transfer balances and not pay them off right away.
How do Credit Card Companies Make Money with Cash Back Credit Cards?
Offering all this cash back to you seems like a good way for credit card companies to lose money. They make money even on those who spend and pay off their card in full each month. There are numerous ways card companies make money off of you and their cards. Paying you a cash back bonus a few times a year isn’t hurting the bottom line.
One of the most profitable aspects of any credit card for an issuer is the fees paid to them by the stores and shops that accept cards. Most stores pay anywhere from 2% to 4% of the balance of each purchase paid for with a card to the credit card company. They also earn money on interest paid by those who choose to carry a balance. There are fees paid to transfer credit card balances. There are fees to pay online or over the phone in some cases, and by those who make late payments.
Card Companies that Offer Cash Back Credit Cards Earn Profits With Merchant Fees
A credit card company can make a lot of money from people who earn significant cash back and still pay off their balances in full. Say for example a consumer has a card and spends $30,000 per year on the card paid in full at the end of each month. There is not one cent of interest paid, and the company still earns money from that consumer. If every purchase the customer makes requires at 2% fee paid to the credit card company, that’s at least $600 per year in fees for one card. If the fee is higher for some merchants, it’s even more.
Should You Apply for a Cash Back Credit Card?
The answer is yes. You should apply for a cash back credit card. However, don’t apply for one unless you can make it work for you. You can even earn free travel with cash back cards.
– Pay the balance in full each month
– Pay for everything with your card so you can earn as much cash back as possible
– Take advantage of special offers
Find the card that works best for you. There is even a secured cash back card and a cash back card for students. Don’t assume a card that pays 1.5% cash back on all purchases is a less profitable card than one that offers 1% on all purchases but 5% on special purchases. Depending on your spending habits, the flat rate might be more profitable. The key to making money with a cash back card is to pay the bill in full each month. Any outstanding balance you owe is going to sit there unavailable for you, which limits your cash back earnings.
Always Pay Cash Back Credit Cards in Full
It’s also helpful to use your card for everything. Pay your bills with your credit card. Use it for gas, groceries, the utility bill, and anything else you buy or pay for each month. Use the cash you normally use to pay for these items to pay your credit card bill at the end of the month. You avoid going into debt while simultaneously getting paid for making purchases you make regularly. Imagine getting paid for paying your utilities each month and take advantage of that ability.
When you pay fees with a cash back credit card, you lose money. This isn’t earning money. It’s paying money to the creditor that’s rightfully yours. Using this card correctly is where you benefit the most from a cash back credit card.
Use Cash Back Credit Cards and Earn Cash Back Reward Benefits
Lastly, it’s important consumers understand using a credit card is not a bad thing. Misusing it is a bad thing. If you use your card correctly, you’re able to earn money and still maintain a lifestyle free of debt. Getting paid to go to the supermarket and pay your electric bill is a nice side income. This cash back reward is perfect to cash in at Christmas when that big bill arrives. You now know how to make cash back credit cards work for you. It’s time now to find the one that complements your lifestyle.
CreditFast has reviewed the best cash back credit cards on the market. Some of the credit card offers are from our advertising partners. CreditFast has objectively reviewed the features and benefits of each cash back credit card. We have chosen credit card offers based on our editor’s recommendations.
Latest posts by Monica Kowollik (see all)
- Lose your credit card? What to Do With a Lost Credit Card? - August 8, 2018
- Who is a Secured Credit Card Good For? - July 26, 2018
- How to Pay Your Credit Card Bill and 2 Payment Myths - July 20, 2018