How Cash Back Credit Card Programs Work

By: asapcc · March 10, 2016

Categories: Credit Card Tips, Credit Guide

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Cash Back Credit Card BenefitsCash back credit cards have been around for over 15 years. Discover® first introduced this innovative type of incentive to improve brand loyalty. Today, almost every major credit card issuer provides some form of cash back or rebate program. So how much money can you earn with a cash back credit card? We’ll show you how they work and provide detailed examples of the earning potential:

The Basics of Cash Back

Cash back credit cards allow you to earn cash or rebates anytime you use your credit card to make purchases. Rewards often vary – anywhere from 1% to 5% for every dollar you spend. In order to take advantage, evaluate your personal interests and spending habits to determine how you can benefit the most from one of these offers. Since there are several types of reward structures available, always evaluate the individual features of each program. Do you earn a flat percentage on purchases, or is the program tiered? Will you shop at “select” merchant locations, or will this be a general-use card? Is there a limit on how much you can earn? How and when can you redeem your rewards?

Examples of Earnings

The best way to determine if one of these offers will work for you is to do the math. Let’s take a look at some examples of different types of programs (over a 1 year period):

  1. In our first example, assume you apply for a cash back credit card which pays on a tiered structure up to 1% cash back. This card also offers up to 5% cash back at select merchants and partner locations:
Category Amount You Charge Percent You Earn Cash Back You Earn
 First $1,500  $  1,500    .25%  $   3.75
 Second $1,500  $  1,500    .50%  $   7.50
 Over $3,000  $  7,000    1%  $   70
 Select Merchants  $  5,000    5%  $   250
 TOTAL  $ 15,000  $  331.25

In this example, assuming all charges we made at the beginning of the 12 month period, you would receive a check for $331.25 at the end of the year.

* The Discover More Card is a perfect example of this type of offer.

  1.   Here’s another example. Assume you apply for a cash back credit card offering 1% cash back on ALL purchases. You can also earn 5% cash back at grocery stores, gas stations and drugstores:
Category Amount You Charge Percent You Earn Cash Back You Earn
 Regular Charges  $  5,500    1%  $   55
 Groceries  $  2,400    5%  $   120
 Gasoline  $  6,000    5%  $   300
 Drugstores  $  1,100    5%  $   55
 TOTAL  $ 15,000  $  530.00

In this example, assuming all charges we made at the beginning of the year, you would receive a check (or statement credit) of $530.00. Assuming you paid off your purchases quickly and didn’t accumulate too much interest, these earnings could be put directly in the bank or used to buy someone a nice gift!

* The Citi Dividend Select Card is a great example of this type of offer.

Words of Advice

Don’t fall into the credit card company’s trap. Don’t misuse cash back credit cards and create a large debt you can’t handle. Since interest rates are normally higher with these offers, you’ll be paying more if you carry a balance with this type of card vs. a standard credit card (even with all the incentives). Make sure you can pay off your purchases quickly to avoid the additional costs. This way, you’ll have the advantage– not the credit card company!

* See our complete list of cash back credit cards →

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