Credit Cards: What Does Cash Back Mean?

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Cash back credit cards have the same features as any other credit card, but come with the added benefit of allowing you to earn money as you spend. If you make regular use your card for travel, fuel, or personal finance, you'll get a percentage of the money you charge back as a cash reward. The catch is in the fine print, however, so do read the conditions before you apply.

Cash Back May Not Mean Money in the Bank

The cash back is based on the rate of the credit card. For example, if your card gives you 1 percent cash back, you will earn $1 after buying something worth $100. The credit card company usually credits the account with the cash reward each month. It's not quite money in the bank, though you will be able to make purchases using your cash back rather than your credit limit. Some programs give you gift cards, points or vouchers instead of cash you can redeem against future purchases.

Credit Card Company Gets a Good Deal, Too

Credit card providers aren't renowned for their altruism, so there has to be something in it for them -- and there is. Cash back encourages people to use their credit cards more often, which is a massive upside for the credit card provider. The company is banking on customers using the cash back as an excuse to spend more money than they otherwise might.

Beware the Small Print

The value of a cash back credit card lies in the cash reward you get from the money you spend. The problem is, many credit card providers offer different cash back rates for different purchases, such as 3 percent for groceries and 1 percent on fuel. If you're taking out a card to pay for your personal travel, the 3 percent rate is not so great a deal. Also, many of the best offers come with an interest rate that's much higher than a standard credit card rate. This makes cash back only worth having if you diligently pay off the bill each month and avoid paying any interest.

Choosing the Best Card

Ultimately, the best cash back credit card is the one you'll use the most. Many cards have an introductory cash-back rate of, say 5 percent, which then drops to 1 or 2 percent when the introductory period ends. There's little point in taking out a card like this when you're trying to save money. However, if it's just before the holidays and you know you're going to buy a lot of gifts, the extra reward should save you money overall.