How do Cash Back Credit Cards Work?

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Cash back credit cards are familiar to most people. When you make a purchase with a credit card, a percentage of the amount will return to you on the scheduled date, usually once a year. While this may sound like a situation where you don’t lose, it may not be.

The cash back credit card service began in the early 1980s with Discover, a credit company. They entered the credit card market later than Mastercard and Visa. To be able to squeeze in, they needed an edge. The cash back card is put forward.

It’s a simple idea. When you make a new purchase with a credit card, will return a percentage of the purchase. Discover’s first offer is a 1% discount on all new purchases. This set the standard for a long time. While higher rebates are possible, they are usually focused on specific expenses, such as groceries, gasoline or specific merchants.

But the cash-back offer worked. Although Discover has made slow progress in moving into the credit card business, they have been stable for years. And gaining almost the same recognition as Visa, at least from a brand point of view.

Cash back sounds tempting, but when you have a regular balance on your credit card, your first priority is always the card’s APR. Creditors make money by charging an interest rate on your credit card balance. Cash back cards often have slightly higher annual interest rates than other cards. This may not always be the case, but as a general rule of thumb is.

Your APR will have a bigger impact on your finances than the small amount you get at the end of the year by using a cash return card. Don’t forget that you’re only going to get 1% to 5% a year, which is a lot less than what you’re going to pay in balanced interest. If you can find a lower cash back credit card offer than a regular credit card offer, then accept it. Unfortunately, you usually don’t.

Now, it seems every credit card issuer has cash back offers, and consumers have a variety of options. An increasingly popular program is tiered services. In this plan, the amount you spend with your credit card determines the percentage of refund you receive. A simple example would be a 1% refund rate for less than $2500.00, a 2% refund rate for $2501.00 to $5000.00, and so on.

But if you want to take full advantage of the offer, here are a few rules to keep in mind:

  • Do not make balance transfers.
  • Do not use cash advances.
  • Always pay the balance in full each month.

Under the terms and conditions of each credit card agreement, balance transfers and cash advances are handled differently from new purchases. Unless otherwise specified in the contract, both options charge interest immediately, and the annual interest rate is much higher than the new option. And balance transfers almost always come with an extra charge on top of that. While this interest may be a small amount of money, it does reduce the return on cash. Don’t ignore it.

So if used in the right way, cash back credit CARDS can benefit consumers. But if poorly managed, they can cost more than they are worth, which is not worth the cost.

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