Cash Back - Definition, Types, Examples, Pros & Cons, What is it? (2024)

Cash Back Definition

Cash Back or cash rewards refer to a loyalty scheme offered by credit card or debit card companies to the card holders as a percentage of the purchase amount, mostly in the form of cash refunds. Companies design rewards to make their customer go for regular repayments of the credit card purchase without defaulting.

Most of the time, cash refunds get deposited in the credit card holder's account. Companies give customers cash-back from 1% to 5% of purchases. Nowadays, manycash back appsand websites also offer cashback on purchasing. They use this strategy because it is the best marketing approach to attract existing & new customers to use credit cards that are often deemed risky.

• Cash back is a strategy credit card companies use to subtly nudge customers to use their cards for purchases and earn cash rewards.
• Rewards get deposited in bank accounts as account deposits, a statement credit, gift cards & charity donations.
• Four major cash back cardtypes include flat-rate cash back cards, cashback credit cards plus bonus categories, rotating bonus typecash back cards, and customizable bonus types.
• They come with pros & cons like excessive spending, bad credit records, low Annual Percentage Rate, and higher interest rates for card holders.

Cash Back Explained

Cash back meaningdescribes a marketing strategy of credit card companies to make their customers use a tier credit card to shop more and get a percentage of their purchase amount as cashback in their accounts. It is also called reward, discount, allowance, compensation, kickback, reimbursem*nt, rebate, and repayment. Every credit card company provides a certain fixed percentage of cashback on the total purchase by customers either for every spot-on purchase or monthly basis.

The criteria for getting eligible for cashback offers are - being a regular user of a credit card, full repayment of dues every month, and non-default of payment of previous purchases. So, the reward depends on a good credit score. In addition, the credit card companies offer different types of rewards on their cards like:

• Account Deposit - Reward or cashback gets deposited in the bank account linked to the credit card when it gets redeemed by the cardholder.
• Statement Credit - Some cards add cashback to the credit card balance when the cardholder redeems the money reward.
• Gift Cards - A few cards offer money rewards in gift cards. For example, Amazon's online shopping website gives Amazon gift cards to its users.
• Charity Donations- Few card companies allow cardholders to donate cashback rewards to a charitable trust. However, only purchases using plastic money are eligible for the rewards. Otherwise, any cash transfer or advances using a credit card get ineligible for cashback from the companies.

Examples

Here are a few cash back examples to clarify the concept better.

Example #1

Let us take the example of cashback credit A offering:

• They offer 2% cashback on utility bills.
• 3% cashback on groceries.
• And 1.5% cashback on all other purchases.

Hence, if one spends $100 then -

• Utility bills give $2 as cashback.
• Groceries give $3 as cashback.
• For all other purchases, it gives $1.5 as cashback.

Example #2

Bitpay, the world's largest provider of Cryptocurrency payment services, partnered with Cardlytics to launch a cashback reward fortheirprepaid cryptocard users. Cardlytics is a cashback reward platform. It manages rewards in such a way that users receive approximately 15% cashback making the Bitpay card easy to use at participating retailers' stores. Users can also avail themselves of the rewards while dining, shopping, entertainment, travel, and gaming.

This act will be a nudge for the users to use their cards. The companies have simplified its usage by developing an easy-to-use app. The app highlights deals and offersand offers users a customized shopping experience.

Types Of Cash Back

The cashback offered by credit card companies gives a percentage-based reward account as money for each dollar the customers spend. However, there are four major types of cashbacks below:

1. Flat-Rate Cashback Cards

The most common type of credit card available in the United States market offers a flat rate of 1-2% cashback for every dollar the card holders spend. However, the cashback remains the same irrespective of the category of shopping done. Citi® Double Cash Card with2%cashback is one example of this type ofcash back credit cards.

2. Cashback Credit Cards Plus Bonus Categories

It is also known as a tiered credit card offering cashback depending on the type of purchases by the customers annually. The spending reward is lesser than the flat rate card. For example, the blue Cash Preferred® Card from American Express offers customers up to6%cashback.

3. Rotating Bonus Type Cashback Cards

These cards mostly provided 1% cashback on all purchases, except the bonus category. The bonus category gives 5% cashback up to fifteen hundred dollars. Chase Freedom Flex℠ provides5%cashback up to fifteen hundred dollars.

4. Cashback Cards Having Customizable Bonus Types

One can customize as per the spending categories set by the cardholder. Moreover, one can set which category of purchase gets the maximum cash rewards. For example, Bank of America®'s Customized Cash Rewards Credit Card is thetopcash back cardthat gives the customer a3%cash reward.

Pros And Cons

Using credit cards for cashback have both - pros as well as cons. Let us examine the pros and cons in the following table:

Frequently Asked Questions (FAQs)

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This article is a guide to what is Cash Back and its definition. Here we explain types of rewards, types of cash backs and pros and cons of using credit cards for cash back. You can also go through our recommended articles on corporate finance-

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