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Cash Back On Credit Cards Explained

Cash back offers are a type of rewards program where the cardholder receives a cash rebate equal to a specified percentage of the amount charged to the card on an annual basis.

Cash back reward programs started appearing in 1990 when the Discover Card made their industry-shattering 1% cash back offer. Other cards soon followed.

Cash back programs typically come with higher interest rates than cards that do not offer a cash back incentive. If the cardholder does not pay their balance in full every month, that higher interest rate can offset the value of the cash back incentive.

A recent survey by BankRate.com revealed that four out of five cardholders preferred to receive lower interest rates rather than cash back. Nonetheless, cash back rewards can make sense for people and organizations that make large purchases regularly and pay the balance in full.

The original Discover Card cash back offer was pegged at 1% of annual purchases. This means that a cardholder who charged $10,000 over a 12-month period could expect to receive a check for $100.00.

As cash back reward programs spread throughout the charge card industry, and consumers began to take advantage of them in large numbers, charge card issuers began to adjust the payment percentages to offset the sums they were obligated to pay out each year.

Most card issuers established a tiered level of rebates that were tied to amounts charged to the card. Scenarios such as 1/10th of 1% for monthly purchase below some high dollar amount, such as $2,500, became common. Today there are a number of different payment programs in effect and it can be a full-time job just selecting the card with the best offer.

In recent years some charge card issuers have been partnering with large corporations to establish attractive cash back offers tied to purchases of specific products or services. Citibank, for example, launched their Dividend Rewards MasterCard which offers a 5% rebate on gasoline and grocery store purchases, along with drug store purchases, and 1% on all other types of purchases. General Motors issued a MasterCard which offered cash credits that could be used to purchase GM vehicles.

Charge card companies offer cash rewards to stimulate usage of their particular card. The amount that they pay in cash back to the consumer is offset by the fees that merchants pay to accept the card. They also hope that the consumer will build up a balance greater than they can pay in full which brings the card issuer additional revenue in the way of interest charges.

Author: Jeremy Zongker

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This article has been provided courtesy of Art Affiliate.

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Cash Back On Credit Cards Explained

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