As more stores and shops accept credit cards as a form of payment, cash-back credit cards are becoming more common. Cash-back cards might seem like a nice thing for card issuers to do, but the truth is that these cards make them a lot of money. But the truth is that these cards also offer a big chance for cash back rewards and rebates, which could be good for both the cardholder and the company.
Because online business is coming back (and with it, online credit card transactions), there are a lot of new, personalised credit cards on the market. This has never happened before. And, in line with the rise of online shopping, the cash-back credit card is one of the most popular new credit cards. Cash back credit cards work in a very simple way: when you shop with your cash back credit card at certain stores or retailers, a portion of the money you spend comes back to you in the form of a credit to your account or a check (or in some cases a gift certificate to a particular retailer.) Even though the rewards aren't very big, the money you get at the end of the year is kind of like a "thank you" gift from your credit card company. How kind and even selfless the card issuer is, right?
It's not quite as simple as that. Cash-back credit cards can only be used to promote the card issuer's business, and they can only be given out as an incentive to make more purchases. You might think that the company just gives these rewards out of the money that cardholders put into the company in the form of monthly interest, annual fees, and so on, or from the credit card company's cash reserves. But that doesn't happen very often. When you use a cash back credit card at a store, the money you get back wasn't your money or the money of the credit card company. It comes out of the pockets of the stores and shops where your transactions take place.
If your credit card has ever been turned down at a store or restaurant because they don't accept it, here's why: In order for retailers to accept credit cards, they have to pay a small fee to the credit card company. This fee is a small percentage of the purchase amount. Card issuers make a lot of money off of these fees because they have figured out how to share a portion of the merchants' transaction costs with cardholders in exchange for more purchases. It's clever, isn't it?
If your credit card company has a cash back credit card that gives you 5% of your money back on all gas purchases, you have a good reason to buy gas from your local station more often and on credit. This is good for the credit card company for two reasons: first, you're using their services more often, so your balances are going up, and second, every time you use your card at a gas station, the station also pays.
But this is not a bad deal for the gas station either, since more credit card holders are going there and buying more gas, and the credit card companies only get a small portion of the price. This makes them more likely to do business with that credit card company, since doing so is now a good way for them to make money (as well as a slightly more powerful source of expense.) And finally, once cardholders get their cash back, guess where they'll probably spend at least some of it using the newly added credit on their cash back cards?
It's a clever and helpful arrangement. But it seems like everyone in the circle of cash-back credit cards wins. Both the credit card company and the gas station make more money, and the cardholder gets a discount on purchases in the form of cash rebates or rewards. Card issuers will likely have to pay more for these programmes as more cardholders learn how to use them to their own benefit. However, cash back credit cards are still very popular with consumers and don't look like they're going away anytime soon. Even though not everyone in the cash back benefit loop is doing it for the greater good, cash back cards still make sense for everyone.
