How cash back credit cards work


Cash back credit card programs have been around for about 15 years and are as popular as ever. While three out of four credit card users are more interested in low or 0 percent APR, cash back reward programs offer a very solid value to those who pay off their balances every month and don't require a super-low interest rate.

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Cash back credit card reward programs started out rather simply, offering a flat percentage rate (typically 1 percent of purchases) rebated back to the customer in the form of a check at the end of the year or a statement credit.

The economics of these offers forced many banks to dilute the real value with tiered earning structures which paid a fraction of 1 percent for purchases below a very high dollar threshold (such as $2,500) per month. This structure is quite common among many of the issuers cash back credit card reward programs but there continue to be some notable standouts that shine in terms of generous earning opportunities and simplicity. For example the Citi Dividend Rewards MasterCard program pays a flat 5 percent on all grocery, gasoline and drug store purchases and a full 1 percent on all other purchases, regardless of spending amount.

With the case of the simpler programs the bank merely calculates the flat rate against all spending (or different rates for certain category purchases, as with the Citi Dividend Rewards MasterCard) and prints the earned amount on each month's billing statement. Once the amount reaches $100 the cardholder  can call to order a check.

The more complex programs can be confusing since the banks rarely show which purchase amounts earned cash back at which tiered rates. A single earned amount is generally reported on statements or is available upon request to their customer service department. The more common theme seems to be the requirement for the cardholder to order their reward check rather than it being automatically mailed, as was the case in previous years. This requirement generates what is know as "breakage" in industry parlance and means increased profits when consumers fail to collect their earned rewards.

Bottom line is that cash back credit programs involve three basic components - a percentage earned on purchases, spending in certain categories sometimes being rewarded at higher rates and the method by which rewards are delivered to the customer.

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Updated: 01-20-2018