What Is Cash Back? More Money In Your Pocket

By Matt

At least that is the idea when simplified. A credit card issuer returns a percentage of every purchase made with the card to the cardholder. In practice, however, the formulas used to calculate cash back can be complicated and confusing. Since credit card statements usually just tell you the amount of cash back you have earned, not how or where you earned it, trying to figure out how you can maximize your savings can feel like beating your head against a wall. Having an understanding of how the rewards are calculated, and how different offers vary, will allow you to select the cash back credit card that is right for you.

Calculating your cash back

Most credit cards offering cash back redeem one percent of all card purchases back to the cardholder. In addition to the base rate, premium redemption rates are offered when the card is used at sponsored partners or specific categories of retailers. For example, one card might offer five percent on all purchases at supermarkets and gas stations, another card might require you to shop at a specific supermarket to earn the premium. Sometimes the premium is available at particular stores and particular categories. It is a good idea to frequently check the credit card website to see where premiums are being offered.

In addition to earnings, cash back rewards can be maximized when redeemed for gift cards or discounted items online. Typical offers allow you to purchase $25 gift cards for $20 rather than redeeming for straight cash.

How do I redeem my earnings?

Redemption is usually made available through a check mailed to your address or via a credit to your bank or credit card account. Some cards require the accumulation of a specific amount, $50 or $100, before redemption can take place. Generally, the rules for redemption online are more relaxed than taking a straight cash payout.

Three restrictions you should be aware of:

1. Rotation – Categories and partners offering the premium cash back rate are often rotated throughout the year. Some cards let you choose the categories where you can earn the premium rate. Check your invoice and monitor the credit card’s website.
2. Maximum redemption – Many reward credit cards put a limit on the amount of rewards that can be earned in a year. If you reach your limit it might be a good time to start using another card if you want to continue earning rewards.
3. Introductory offers – They are used as added incentive to get you to sign on the dotted line.  Make sure you are aware whether your introductory interest rate will jump to 22% after six months. Sign up bonuses usually require you to hit a spending target with in the first few months before they are triggered.

A cash back credit card can offer exactly what it says: cash back to the cardholder. As long as you are aware of your reward structure, you can make your credit card work to put more money in your pocket.