Imagine that you are going to apply for a new credit card. You are looking at your options when you notice that the issuer also offers cashback cards. At a glance, a credit card that gives you a small percentage of each purchase back as a reward sounds like an amazing deal that is too good to pass up! Too good to be true right? How does the credit card company even benefit from this?
Well, like with all credit cards, there is always a catch. Yes, cashback cards can be beneficial. It is essentially a rewards card that can help you simplify your finances, earn rewards on spending, and take advantage of extra privileges that debit cards don’t offer. It is also rather simple to understand, which makes it a decent choice as your first rewards card.
However, there are some caveats you need to consider before signing up for a new card. Based on your needs and situation, you may find that a cashback card might not be a right fit for you compared to a reward points card or a travel card.
How does cashback work?
Cashback cards are a relatively simple concept. They offer a percentage of cash back on every valid purchase. For example, If a credit card offers 1 percent cash back on every purchase you would earn 1 sen in cash back rewards for every ringgit you spend. Some credit cards offer a flat percentage back on all purchases, while others may offer higher cash back percentages on certain popular spending categories.
Unlike travel credit cards, which often reward cardholders with points or miles that may differ in value depending on how said points are redeemed, cash back rewards have a fixed cash value. As such, cashback card holders have the option of redeeming their cash back in the form of statement credits, online purchases and more.
You might be wondering how credit card companies might benefit from offering cashback rewards. After all, isn’t cashback just free cash that is being given away to the cardholder? The short answer is no, it is not free cash.
When merchants accept payment via credit card, they are required to pay a percentage of the transaction amount as a fee to the credit card company. Should a customer utilise a cashback card, the credit card issuer simply shares some of the merchant fees with the customer. The card company benefits by incentivising people to use their credit cards when making payments rather than cash or debit cards, both of which do not earn the customer any rewards. The more you use a credit card, the more merchant fees the credit card company can earn.
What you should know about cashback cards
To determine if cashback cards are right for you, first take a closer look at its terms and conditions.
- Understand how the cash rewards work
The first and most obvious part of cashback rewards is getting some of your cash back after making a valid purchase. Each cash back credit card has its own earning scheme, but the general concept remains the same.
Some cards offer a flat rate for cash back while others can offer more on select categories like groceries or petrol. Understand what your cashback card actually offers before you sign up and start spending.
- Check for annual fees
For the most part, most cash back credit cards do not usually charge an annual fee (though there are some that do so read the terms and conditions carefully). That means you will not have to sacrifice some of your rewards to a fee, and you can keep the card open without having to pay even if you decide to make use of another card in the future. This can be rather worthwhile as it adds to your credit history and can strengthen your credit score.
- Know the terms to qualify for a sign-up bonus
Credit card issuers like to sweeten the deal to get you to apply for a card. Like travel rewards credit cards, many cash-back credit cards offer a sign-up bonus. The bonus can either be received immediately upon sign-up, or redeemed after you meet a minimum spending requirement within the first few months. Sometimes, these bonuses can be worth hundreds of ringgit in value.
- Make use of any additional shopping perks
In addition to sign-up bonuses, cashback cards can also include additional shopping benefits that can help you save some money. These perks include a lowest-advertised-price match, extended warranties, refunds or return guarantees, and more.
Not all cards offer these features and they are also not unique to cashback cards (travel and reward points cards can also have these), so it is best to read and understand all the card details beforehand.
- Check for foreign fee charges
When it comes to travelling and foreign transactions, travel credit cards are more likely to waive foreign transaction fees. On the other hand, cashback cards may charge you an additional fee for purchases made abroad. There are however, some cashback cards that do reward you for spending overseas, but these are more of an exception rather than the rule.
- Keep track of the earning caps and categories
Some cashback credit cards let you accumulate unlimited rewards, while others set caps on the amount of cash you can receive back for regular or bonus category spending.
Unlimited cashback cards do exist, but keep in mind that they may offer lower rates to compensate for the lack of a monthly cap.
Is a cashback card what you need right now?
Cashback rewards are tempting, and they can help you save a bit on credit card purchases. However, always read the fine print as these cards always come with some form of limitation. Card issuers need to make a profit somehow and these programmes do not appear as generous as they may seem on the surface.
There are incentives for consumers to use their credit cards over cash or debit cards, as they generate increased merchant fees for the credit card company and may also cause some consumers to increase their debt if they are not careful.
Checklist before you sign up for a cashback credit card:
- make sure that you are more interested in earning cash than travel rewards
- know your self-discipline and control to avoid racking up debt
- compare cashback credit cards’ rewards schemes, sign-up bonuses, and perks
- choose a card that will rewards you best for your spending needs and choices