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What could be easier than getting some cash back on the things you buy every day? Here’s how cash-back credit cards work and what makes them attractive to some consumers.
Cashback cards come in many varieties – bonus tiers, tiered rewards, and flat rate cashback – but they all pay off. Fixed rate cashback cards are perfect for those who “set it and forget it”, but bonus tier cards and tiered bonus cards can earn you more rewards if you’re willing to put in a little effort to maximize your cashback at a given spend. categories.
How cashback cards work
So how do all these cashback cards work? It’s simple: cashback is, in fact, a discount in the form of a percentage of the purchases that you make with the card. With fixed rate credit cards, each purchase earns the same percentage of cashback, while category bonus cards and tiered bonus cards require different types of spending to earn more cashback.
Card issuers can afford cash back because merchants pay an exchange fee on every transaction. “When you pay a seller $100 with a credit card, the seller only gets about $97,” says Daniel Mahoney, a certified financial planner in Atlanta.
For example, a $700 TV will bring you $14 with a 2% cashback card. In the meantime, the seller paid a transaction fee of around $21 when you paid with your credit card.
“Rewards or rebates may also be funded through transactions between the credit card issuer and specific merchants,” Mahoney said. An example of this is the cashback you earn through card-related offers.
How do card issuers know which types of spending qualify for which percentage of cashback? Vendor category codes are four-digit numbers that represent the type of business, such as a gas station or grocery store. Credit card networks use these codes to classify and track purchases.
How to earn cashback
There are three main types of cashback credit cards: Category cashback bonus cards, which offer a high cashback rate in spending categories that change throughout the year; cash back tiered reward cards that offer stable cash back on certain spending categories; and flat-rate cashback cards, which refund you at the same rate on all purchases.
Category of bonus cards with cashback
Category cashback bonus cards offer the lure of 5% cashback on revolving spending categories. These categories are usually set by the issuer each quarter and are usually published a few months before the start of a new quarter. A return of five percent can be good booty if you’re able to maximize spending categories each quarter, but it takes some work.
You must register for bonus categories every three months, and spending in these categories is capped at a set amount each quarter (usually $1,500 for purchases). Because any non-rewards purchase earns 1 percent, you may not be earning the average return you think you are.
Tiered cashback cards
Like category bonus cards, tiered reward cards offer more cashback on certain spending categories, but you should consider which card to use with each purchase to maximize your income.
Restaurants, gas stations, grocery stores, some travel and transportation, some streaming services, pharmacies, home improvement stores, health clubs, and entertainment are just some of the categories where you can earn that 5 percent.
Fixed cashback cards
With simple cashback cards, also called fixed rate cards, you get a fixed percentage of every purchase. There is no need to track and activate bonus categories. You get the same cashback for every purchase.
Whether you choose a flat rate card, tiered rewards card, or a category cashback bonus card, you can earn cashback on all (or nearly all) of your purchases, often with minimal effort.
You may be surprised at how much 1% or more of cash adds up at the end of each month. Just take a close look at your spending habits and the terms and conditions of each issuer to determine if the cashback card you are considering is right for you.