Cash Back

Updated on April 16, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

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. 

Cash Back
Fig 1 : Cash Back

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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, many cash back apps and 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.

Key Takeaways

  • 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 card types include flat-rate cash back cards, cashback credit cards plus bonus categories, rotating bonus type cash 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 meaning describes 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, reimbursement, 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.

Types of Rewards on Cards

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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.
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Example #2

Bitpay, the world’s largest provider of Cryptocurrency payment services, partnered with Cardlytics to launch a cashback reward for their prepaid 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 offers and 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 with 2% cashback is one example of this type of cash 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 to 6% 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℠ provides 5% 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 the top cash back card that gives the customer a 3% 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:

Pros Of CashbackCons Of Cashback
Every credit card has cashback associated with it. APR (Annual Percentage Rate) increases with time.
Absence of annual fee related to the credit card.Sometimes foreign transaction charges get levied on the cashback cards.
The companies allow many shopping benefits. Many credit cards give cashback up to a predetermined limit.
Many credit card companies give zero percent APR. Travel rewards do not get enabled for many credit cards.
Cashbacks don’t get devalued by credit card companies.Interest payment for credit card balance could hamper cashback earnings
Sign-up bonuses are there on every card. Annual Percentage Rate increases with default on credit cards.

Frequently Asked Questions (FAQs)

1. Do cash back credit cards work?

Yes, cash back credit cards work when one pays the outstanding balance of the previous month in full and never defaults on credit card repayment. Otherwise, the interest paid by the user may exceed the reward received by the credit card company.

2. How to get money back from the cash back apps?

The best way to get back money from the cash back apps is to either use the offer given in the app or, if not received the cashback, take help from the ‘need help’ section and cash app support. One can raise a ticket and click on dispute this transaction to get the cashback.

3. Can I get cash back with apple pay?

Yes, one can avail of cash back with apple pay provided-
● The retail store accepts apple pay.
● It has cashback offers; and
● Apple pay gets linked to either debit or credit card of the user.

4. Where can I get cashback?

One can get cash backs on various cash back cards, apps, and websites offering the same.

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-