How Do Cashback Programs Work?

How Do Cashback Programs Work?

Cashback reward programs are used by credit card companies to incentivise the customers for using the card. These programs involve paying back a percentage of the money spent by the customer, in the form of cash. In many cases, the reward points collected by using credit cards are convertible into cash.

In your quest to collect more reward points or get cashback, you may tend to use your credit card more than what is required and fall prey to different types of credit card frauds. And if you are unable to repay the whole amount by the due date you have to pay interest charges on your outstanding balance. This interest is another form of income generated by banks offering credit cards.

How does this cashback system work? What is the benefit available to credit card companies in doing this? Let us find out more about the cashback programs.

Important Features of Cashback Programs

The highly popular cashback option offered by your credit card issuer has certain important features:

  • Cashbacks Come with Limits and Conditions– The credit card company generally sets a maximum limit, and the cashback is available only up to a specific amount.

Once you earn cashback up to the specified limit, the incentive is not available.So, when you apply for a credit card, do check the terms and conditions as the cashback may be applicable only on specific types of purchases.

  • Merchants Pay Fee to Credit Card Companies-When you use your credit card to carry out transactions at different shops or vendors, the merchants have to pay a small percentage of the transaction value as the fee to the credit card company.

This is where your credit card issuer earns income and shares a part of this with their customers.

  • Cashbacks Promote More Spending and May Lead to Outstanding Balances– Credit card companies also earn by charging interest on your credit card balances that remain unpaid on the due date of your billing cycle.

So, when you are using your cards, ensure that you pay back the due amount on time to avoid interest charges that may negate the benefit of earning rewards or cashback.

Beware of Frauds While Using Cashback Cards

You should not, however, shop only to get reward points or cashback as this may raise your credit card bill and result in outstanding balances. Another thing to be aware of while shopping is the type of credit card frauds that are happening.

Here are some tips for avoiding frauds:

  • Use your card only at known shops and avoid shopping at places where something looks odd, or you have a doubt about giving out the details of your card.
  • Do not get lured by promotional offers of new websites and avoid using your credit cards on such sites even when they offer good cashback. This is important for avoiding credit card fraud.
  • Be alert and check your billing statements regularly for timely detection of credit card frauds. Identification of doubtful transactions and their timely reporting to your bank can help you prevent frauds.
  • Signing up for transaction alerts can help you keep track of your credit card usage and early identification of any fraudulent transaction.

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