How Does Credit Card Cashback Reward Programs Actually Works And Why You Must Get One?

how cashback program works

If you are using a credit card, then you might be familiar with what is the cashback rewards and how you can get it by just shopping with your credit card. Often, you will see cashback promotions on websites, either for a specific product or general cashback offers which run across a wide range of products. There are many MasterCards or VISA Card providing the best Cashback reward. Moreover, we will try to go a little dipper on this topic and try to understand a little more.

What is Cashback Rewards?

Cashback reward is nothing but the incentive programs operated and managed by the credit card companies to attract more and more customers and encouraging cardholders to use a credit card for all kind of payments. In credit card Cashback program, a percentage of the amount spent is paid back to the cardholder. Many credit card issuers are rewarding loyalty points, frequent flyer miles or a monetary amount i.e. cashback reward.

Cashback rewards are very popular among the card holders as it feels like getting money back on your money spend using a credit card where non-credit cardholder can’t enjoy cashback. Cashback offers need to be claimed within a specified time after an order is placed. Customers that purchase the promotional products online generally receive a payment within a couple of weeks after they submit a request to claim the cash back.

Under the cashback reward program, cardholders typically receive between 1% and 5% of their net expenditure (purchases minus refunds) as an annual rebate. Often, customers receive cashback monthly and they need to request their cashback as either a check or statement credit. Also, there is a minimum cash requirement for cashback requests. Many credit card companies are offering to convert the earned loyalty points (which were earned while using the credit card) to cashback.

However, these cards generally have maximum monthly or quarterly cashback limit and cashback percentage is different on goods category. For example, Cardholders can earn up to 5% on spending on category clothes or watches, however, spending on a certain category will earn them only 1% like jewelry, electronics, etc.

Because most consumers do not take the time to read the complete terms and condition to understand cashback policy fully, they may open a credit card account under the impression that cash back rewards programs are much more straight forward. Most businesses today recognize cashback as an ideal promotion and it’s really working in their favor.

Why Cashback Rewards is so popular?

Credit Cards offer many Benefits for the Card Holders in the form of loyalty points, discount on selected outlets, online shopping offers, air miles for frequent fliers, from zero to low introductory interest rates, etc. But, Cashback reward is favorite of the cardholders as they have the choice to use it as per their wish. Credit Card companies are investing too much money in advertising their incentives that feature rewards such as cash back on credit card purchases.

No need to discount your products:

In general, when customers are getting the Cashback as a reward, they don’t ask for the discount. At the same time, businesses are able to provide a financial incentive to buyers which helps to satisfy customers without devaluing or discounting your products.

Cashback rewards help to increase sales:

When customers get Cashback, they tend to shop more which provides a great opportunity for businesses to increase sales, drive volume through your channels and reward customers.

Provides different ways to “Cash Out” the earned Cashback:

Cardholders have multiple ways to cash out the Cashback, Cardholders can request to mailing as a cheque, sending a direct deposit to a bank account, donate to a charity of your choice, adjust in credit card balance, etc. Rewards based credit card products like cash back are more beneficial to consumers who pay their credit card statement off every month.

How Cashback Reward Works?

Credit card is the most profitable business and Credit card companies are in the business of making money. They will never offer anything which is not profitable for them or generating money for them. So, What do the credit card companies get after giving cashback rewards and how can these companies offer such seemingly lucrative deals for consumers and still make a profit?

  • When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. You may like to read the complete Credit Card Business Model .
  • In a cashback rewards program, the credit card issuer simply shares some of the merchant fees with the cardholder to incentivize them to use the credit card when making a payment. The goal is to incentivize people to use their credit cards when making payments rather than cash or debit cards, which didn’t offer such rewards. The more a cardholder uses a credit card, the more merchant fees the credit card company can earn.
  • Additionally, credit card companies make money by charging high-interest rates on credit and issuing late fees for balances that carry over from month to month. The more consumers use their credit cards, the more likely it becomes that they will miss a payment or carry a balance for which they will owe fees and interest. If the balance were not paid in full every month the extra interest would eclipse any rewards earned.
  • The rewards-based credit cards charge higher fees to the vendors who accept them without vendors having any notification. This adds more revenue to credit card companies.
  • Most of the times, Credit Card companies will have a deal with many merchants to give special offers and cash back benefits on selected credit cards. These merchants adjust their profit in the product item for the win-win situation for everyone.

In a nutshell, nothing is going from the Credit Card companies, it’s the vendor who manages the profit cut for all parties involved in a successful credit card transaction. You may find my previous article interesting i.e. Are We Indirectly Paying Credit Card Companies From Our Pocket For Using Credit Card Or Debit Card?

Key Takeaway From The Post

Cashback rewards sound enticing, and they can help certain consumers save a bit on credit card purchases. But, you should already read the terms and condition before selecting any credit card because once the restrictions and qualifications are spelled out in the terms and conditions, most of the cashback rewards programs have an annual maximum limit and some cards only offer cash back for certain categories of purchases, such as at clothing at particular retailer, fashion accessories or gas stations.

Credit Cards should be used carefully as these lucrative offers and cashback offers, most of the time encourage to shop more which results in increased debt and chances of missing the payment. Additionally, credit card companies make money by charging high-interest rates on credit and issuing late fees for balances that carry over from month to month.

Most of the Cashback reward cards come with high yearly subscription fees, therefore it is wise decision to choose a credit card which offers cash back at shopping center which you visit on a regular basis as it would earn you good cash back. Also, If you’re already planning to purchase the higher-rate items, cash back cards can lead to great savings. But if you’re spending money you’d ordinarily save just to earn the rewards, the card might cost more than it earns.

You can check out my previous article on Advantages And Disadvantages Of Using Credit Card to know whether you should go for a credit card or not?

Hope you found this article interesting and helped to learn something new. Do let me know what you feel about cashback offers provided by the credit card companies in the comment section. I would love to read your comments.

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