As the name suggests, cash back is when you get back cash as an incentive or reward for spending it in the first place. Cash back is commonly used by credit cards. Whenever customers use their credit cards to make a purchase, they get back cash, based on certain conditions.
For example, Bank of America Cash rewards credit card has a 3% cash back on gas. This means when you spend money at a gas station using your credit card, 3% of what you spend comes back to you as ‘cash back’, an incentive for using the card. This cash back would be credited to your card. Of course, in some cases, there may be an upper limit. For this card, the quarterly limit is $2,500, which means you cannot get more than $2,500 cash back every quarter.
Why do credit cards give cash back?
Credit cards give cash back as an incentive. They want customers to use their credit card more often. What best way to do this than giving cash back to the cardholder. Cash back rewards schemes are a good way to attract new customers. While marketing their credit cards, they use the various cash back schemes to make new customers sign on.
Credit cards also have a points scheme, whereby they give reward points for making purchases. Customers could then spend the points however they wanted. But cash back is a much more attractive option as customers would always prefer ready cash, as compared to points for future redemption.
How much cash back is given?
Usually, most card companies give back a maximum of 5% and even that would be on specific transactions. Generally, 1-2% cash back is the norm. There may be different types of cash back offers for different types of shopping. For example, 3% cash back could be offered for dining in restaurants, 2% for shopping in groceries and 1% on any other purchase.
Sign-up cash bonus is an interesting cash back concept that offers great advantages for card users. For example, a card may offer a $150 bonus cash back if you spend $500 in the first 90 days. When you get a new card you would obviously use it more often. You can get back $150 for spending $500, which translates to a 30% cash back, which is a great offer. But yes, it is just a one-time offer, but it makes a lot of sense.
Alternate concept of cash back
When it comes to debit cards, there is an alternate concept of cash back. This is actually getting hard cash when you need it. The concept is simple, you swipe your debit card at a supermarket for $100 without making any purchases. Once you swipe the card, the cashier will give you $100 in cash for your use. This is an alternative to getting money at an ATM.
Some credit cards also have this scheme, where you can get actual cash back for swiping your cards. But, a transaction fee may be charged on it.
Some points to keep in mind
One thing to remember is cash back is an incentive given to make you spend more money. It is possible that the lure of cash back could make you spend excess of money. Also, make sure you avoid carrying a balance on the card. The interest you pay will override the benefits of cash back.
Cash back is given by credit cards as an incentive for using the cards for purchase. It is a good way for cardholders to make extra money.