Ever wondered how credit card companies reward you for spending money with their card? Heard about cash back and curious to learn more? In this blog post, we'll be breaking down everything you need to know about cash back for credit cards! We'll explore what it means, how it works and some realistic examples to help you make the most out of your credit card rewards. Let's dive in!
What Does Cash Back Means For Credit Cards Table of Contents
What is Cash Back?
Cash back is a type of credit card reward system that allows you to earn a percentage of your spending back in the form of cash or statement credits. In simple terms, it means that you get a small percentage of your money back when you make eligible purchases using your credit card. These rewards can be redeemed in a variety of ways, such as direct deposit, statement credit, or gift cards.
Why do Credit Card Companies Offer Cash Back?
Offering cash back is a win-win situation for both the credit card company and you, the cardholder. Credit card companies make money in several ways, one of which is through the fees they charge merchants for processing transactions. By offering you cash back rewards, credit card firms incentivize you to use their card for purchases. In turn, the companies earn more in transaction fees, while you benefit by earning cash back on your spending.
How Does Cash Back Work?
Flat-rate Cash Back
Flat-rate cash back is the easiest to understand. With a flat-rate cash back card, you earn the same percentage of cash back on all purchases, regardless of the category. For example, if your card provides 1.5% cash back on all purchases, you'll earn $1.50 for every $100 you spend.
Category-based Cash Back
Category-based cash back cards reward you with different percentages of cash back depending on the type of purchase. For instance, a card might offer 3% cash back on gas, 2% on groceries, and 1% on everything else. These cards are great for maximizing rewards on specific spending categories.
Rotating-category cash back cards offer a higher percentage of cash back on specific spending categories that change every quarter. For example, you might earn 5% cash back on grocery purchases during Q1, while Q2 could reward you with 5% cash back on dining out. Typically, you're required to activate these bonus categories each quarter, and there may be a cap on earnings for each category.
How to Redeem Cash Back
- Statement Credit: Use your cash back to reduce your outstanding credit card balance.
- Direct Deposit: Have your cash back deposited directly into a bank account.
- Gift Cards: Redeem your cash back for gift cards from popular retailers.
- Charitable Donations: Donate your cash back to a charity of your choice.
What Does Cash Back Means For Credit Cards Example:
Let's say you have a category-based cash back credit card offering 3% back on gas, 2% on groceries, and 1% on all other purchases. In a month, you spend $200 on gas, $400 on groceries, and $600 on other purchases. Your cash back earnings for the month would be calculated as follows:
- Gas: $200 * 3% = $6
- Groceries: $400 * 2% = $8
- Other Purchases: $600 * 1% = $6
In this example, you would earn a total of $20 in cash back for your monthly spending.
Now that you know the ins and outs of cash back for credit cards, it's time to make the most of your rewards and maximize your savings! Opt for a cash back card that best aligns with your spending habits and you could be earning hundreds of dollars a year just by using the right credit card. We hope this article was helpful and enjoyable to read. Don't forget to share it with friends and family who might also benefit from this information! And as always, be sure to explore our other guides and resources on Flik Eco for more valuable financial tips and advice. Happy saving!