By William Cao. Edited by Arjun Chandrasekar.
Ever been shopping at Target and heard the lines of “With Target’s RedCard™, you can save 5% and get a cashback reward” from the cashier? Well, me too. I always wondered how cash back rewards work and what they are, so, in this article, we will be exploring the ideas of this concept as well as its advantages and disadvantages.
What is it? How does it work?
“Cash-back” usually refers to financial transactions related to credit and debit cards. Cardholders can receive a small percentage of the amount spent on each purchase if they meet above a certain dollar threshold. The dollar threshold is usually small, at around $20 dollars or so from one card to another. This percentage can range from anywhere under a 1-5% threshold depending on the type of purchase at a transaction level. For instance, if John was to make a gas purchase to fill up his car, he would earn 2% on the purchase. While if John was to purchase fruits and vegetables for his grocery list, he would earn a 1%.
Pros and Cons
Believe it or not, there are also disadvantages when using cash-back credit cards. Getting a reimbursement on purchases after meeting a certain payment requirement is an obvious plus. Also, discounts on products can apply and a sign-up bonus can be issued by the credit card company.
However, there are many downsides to using such cards. Yes, I know. You have to actually spend money in order to get a small kickback. The money actually can take a long time to be issued back. These cards may also have a high annual percentage rate (APR which is calculated by [(fees + interest) / principal ) / # of days in loan term] * 365 * 100) or there can be a certain limit on how much you can earn back. Rewards can also be taken back if bills are not paid on time or if the credit card is canceled.
Joining cash-back programs from your credit card issuer is a certain way to earn some money back based on your purchases. There are promoted cash-back apps or websites that can provide deals and discounts on products. Few drawbacks are present, including that there is a certain limit and a high APR.