One type of reward credit card that always proves popular is the cash reward credit card. Instead of earning points, miles, or any other abstract benefit, you simply receive cash!
Another article on this site looked at the point at which credit card rewards become uneconomical. For clarity, some details were omitted, including just how credit card providers pay for these cash rebates. Of course, when people don’t pay off their balance in full each month, the credit card companies make their profit soon enough. But what happens when financial habits change suddenly, and people start clearing their debt earlier? This would undoubtedly eat into their profits, and may become unsustainable.
But there’s a missing piece of the puzzle, namely the merchant. While everyone is aware that they have to pay interest on their credit card purchases (with the exception of some introductory rates), what’s often overlooked is that when you pay for something by credit card, the store you buy from also has to pay a commission to the credit card company!
And that’s where the cash back comes from. Instead of risking a potential loss with their rewards system, the credit card provider simply shares a portion of the merchant’s commission with you. When you don’t clear your balance each month, they still make money by charging you interest.
Although it really seems like a win-win situation for the card issuer, you can still make it work for you too, by paying off your balance in full each month.
Things to watch out for with a new credit card
Credit card providers will offer a lot of great deals to entice you into switching over to their card. As always, don’t be too tempted by initial offers, because they usually run out after a few months. Instead, look past the introductory rates and make sure your card offers real long term value.
With cash back credit cards, check out what purchases qualify for rebates, and how much you get back for each one. Normally, certain purchases (groceries, gas, etc) will offer one rate, while others will give you a lower rate. While this can make it difficult to estimate how much you’re due back, you’ll find that most cards operate this way.
It is also worth being aware of how and when you’ll receive your cash back. Often, you’ll get a check at the end of each year, or a credit against your account. Some rebate cards may give monthly rebates, but annual is more usual.
Finally, your credit card provider may have some special deals with selected merchants. If you normally make a lot of purchases from these vendors, you may get even better rebates for these. Just make sure their selected partners are ones you would definitely use!
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