How Cash back credit cards works

How cashback credit cards work

 
How do all these cash back cards work? Cashback is essentially a rebate of a percentage of the purchases you make on the card.
Card issuers can afford to pay cash back because merchants pay an interchange fee on each transaction. “When you pay a merchant Rs. 1000 with a credit card, the merchant only receives about Rs. 970”.
 
For example, a TV that costs Rs.35000 would net you $32000 with a 2 percent cash back card. The merchant, meanwhile, paid a transaction fee of around 2% when you paid with your credit card.
 
Rewards or rebates may also be funded by deals between the credit card issuer and specific merchants. Mahoney adds. An example of this is cash back earned through card-linked offers.
 
With flat-rate cash back credit cards, every sale earns the same percentage cash back. With category bonus cards and tiered bonus cards. different types of spending earn more cash back.
 
How do card issuers know what types of spending qualifies for which percentage of cash back? Merchant category codes are four-digit numbers denoting a business type, such as a gas station or grocery store. Merchant category codes used by credit card networks to categorize and track purchases.
 
Cashback cardholders can redeem their rewards as a statement credit or deposit in a banking account. To buy gift cards or merchandise, or donate their rewards.
 
Check with your card issuer’s rules on cash back redemption amounts and options. The Citi Costco Anywhere Visa, for example, issues rewards annually as a certificate with the February statement.
 

Why cash back cards? They trump bank account interest rates

 
With bank interest rates still low – typical savings account earns a measly 0.06 percent annual yield. The ability to earn even 1 percent on every purchase trumps the best bank interest rates. Your return is even greater with cash back cards offering a flat 1.5 percent, 2 percent or more on every sale.
And unlike the interest on your bank account, cash back comes tax-free.
 
“The IRS has historically viewed credit card cash back as a nontaxable rebate on the buy price, rather than as a taxable form of income,” says Mahoney
 
Something else to think about: Cashback, if loaded back on your card, also earns its own cash back when you spend it. Adds financial planner Andrew Feldman of Chicago. “It’s a fraction, but it’s still a little more cash,” he says.
 
Factor in that some cash back cards offer sign-up bonuses of Rs.150 or Rs.250, and that is even more cash for you for using the card.
 
Let’s take a look at the three types of cash back cards, and the work (or simplicity) involved in using them to earn the most rewards. Spoiler alert: According to our cash back credit cards survey, the complex is out and simplicity is in.
 

3 types of cash back cards

  1. Category bonus cash back cards

 
Category bonus cash back cards offer the lure of 5 percent cash back from revolving spending categories. Cashback cards with rotating bonus categories include the Discover it Cash Back and Discover More cards. The Chase Freedom and Citi Dividend cards.
 
Five percent back can be a nice haul, if you are able to most out the spending categories each quarter, but it takes a bit of work
 
First, you have to register for the bonus categories in every three months, and spending categories are capped per quarter. Since any purchase not done in the bonus category period you will earn 1 percent, you may not be getting the average return you think you are
 
Also, with Discover Chase Freedom, bonus categories are set by the issuer every quarter or usually released a few months before the new quarter starts.
 
The Cash+ Visa Signature card is a variation on the rotating bonus category theme. But the cardholder picks the bonus categories that will earn the most cash back for the types of purchases they make most

2.Tiered rewards cash back cards

 
Like category bonus cards, tiered rewards cards offer more cash back in select spending categories. But to maximize your earnings you have to think about which card to use with each purchase.
 
For example, the Blue Cash Preferred card from American Express offers 6 percent cash back at supermarkets (up to Rs 6,000 in purchases per year). 3 percent cash back at U.S. gas stations and select department stores and 1 percent cash back on all another spending
 
The  Visa card from Barclays, meanwhile, offers 4 percent cash back at restaurants and bars, 3 percent on airfare and hotels, 2 percent on online purchases and 1 percent on everything else.  
 
Feldman puts all his business expenses on his tiered rewards American Express SimplyCash Plus business card and his own personal expenses on a Citi Double Cash card that delivers a flat 2 percent
 
His AmEx business card rewards 5 percent on office supply stores and wireless telephone service, 3 percent on gas (cardholders choose from eight categories for this tier)
 
 “The AmEx works out to about 2 percent, maybe slightly under,” Feldman says. “I just don’t spend enough on office supplies to max out that 5 percent category.” 
 
“Could I get back another couple dollars at the end of the year by using a credit card targeted to each category of my spending?” Feldman asks. “It’s possible, but I’d have to think about which card to use every time I made a purchase and that would make my life crazy.”

3. Simple cash back cards

 
With simple cash back cards, you earn a flat percentage with every purchase. There’s no need to track and activate bonus categories. You earn the same cash back on every purchase.  
 
“That’s effectively 2.625 percent cash back, but lots of things count for that, even Uber and Lyft.” 
 
Feldman recently switched from Capital One’s Quicksilver 1.5 percent cash back card to the Citi Double Cash card which earns 2 percent cash back
 
Why did he switch? “Two percent is better than 1.5 percent,” he says.
 
Also, you miss the convenience of being able to log and get my rewards points in one sweep or set it up for an automatic 350 or 3500,” he adds. “you like to cash in my points immediately so I don’t forget about them.”
 
Frequent-flyer expert Gary Leff likes the Fidelity Rewards Visa and Citi Double Cash cash back cards.
 
With the Fidelity Rewards Visa, cardholders earn 2 percent on all purchases, but you need to be a Fidelity account holder with excellent credit to qualify for the card
 
“Most people aren’t going to beat 2 percent cash back, even with travel rewards,” says Leff, who blogs at View from the Wing

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