Cash back credit cards, facilitate paying you some cash back, when you shop. Why? Because they are so pleased that you actually went out shopping? No! Nothing really comes for free. They are looking at ways to make profit for themselves in a way that you feel you are being benefited. You can benefit too, but only if you understand how you'd end up losing money in the process.
"There Ain't No Such Thing as a Free Lunch"
Already these credit cards have created a financial nuisance in our lives and on top of it, they offer us these magnetizing 'cash back' schemes. I know it looks lucratively tempting, and I don't blame you for that. But, you can't really go with it blindly and I will tell you why.
To understand the motive behind this scheme, you need to know how does it benefit the credit card companies. These credit card companies give you credit money to use 'for free' for a 'particular period', only. Okay! So, if we all started to repay our credit card bills on time then, the credit card companies will have to shut down. The only way they can generate profit is by charging a whooping rate of interest on the money spent by us. Most of us do not pay the money on time and end up paying the huge sum of interest. The credit card companies are doing so well, so imagine, how many people end up defaulting. Also this card is not assigned to anyone, it is assigned to those who are earning in a capacity to pay more than what they spend.
We get our credit cards thinking that it will help us in the times of a cash crunch, but eventually we end up spending this money in shopping for unnecessary things (except grocery). First we pay from our credit cards and then we pay the same amount + the interest on it, from our debit cards. This is the basic working of the credit card system. This is certainly not fruitful! Though if you are smart enough and not blinded by the so-called 'free money', then you will walk out making these cash back schemes fruitful.
Cash Back - Really?
In a cash back scheme the credit card companies return to you a certain percentage of the money spent by you, with the credit card. But the catch is, if you fail to pay the sum by even a day, you will end up paying more than the cash that has been or is going to be returned to you.
Now let's see how the credit card companies magnetize us to the 'Cash Back' schemes. Offering a cash back scheme is just another strategy to get you to spend more money and pay more interest on it. There are ways in which the financial experts implement this. Let's see how.
1. Earn Points with Goods
Credit card companies give you points with the purchase of every good. For Example: If you have bought 10 things worth the same value then they will assign you 20 points. You can later redeem these points and buy something or redeem it in the form of cash.
2. Earn Points With Each Dollar Spent
A few companies offer a scheme wherein they pay you cash back on every dollar you pay or as a percentage of the total money you pay.
3. When Will You Receive The Cash back?
A lot of companies trap you in the cash back scheme by paying you that money after a certain period of time and sometimes only after spending a certain amount. You have to watch out for the trap.
4. Cash Back- Purchase Categories
Credit card companies sometimes limit their cash back scheme to only a few goods and commodities, not all. You need to watch out for that too.
5. You are Saving- So Spend More
The main strategy is that when we are paying you some amount of your spent cash back, that means that you are saving some money, and now that you are saving the money you were anyway going to spend, you can actually buy more. But in this disbelief we end up buying goods worth more than the returned cash, wiping the returns away. Avoid it!
6. Consolidation of Savings and Credit Card
Another way of driving you to spend more is by offering you a higher rate of cash back, if you have the credit card from the same company you have a savings account with. The idea behind this is so that, they know what your financial stand is, and if you default then they know where to get it back from.
Are They Worth it?
If you are a shopaholic then, "NO!" it is not at all worth for you. However, if you are a disciplined and a rational buyer, then you can actually derive benefits from these schemes. So, if you pay your bills on time and can keep a track on your due date and the profit you'd make with the cash back scheme then you can actually save, and profit from it. Also many buyers are attracted to this scheme because they love it when they receive these cash back checks at home. The best part about them is that you get some cash back and not goods. You can use that cash to buy anything you want.
Checklist- When Using a Credit Card Offering Cash back
1. Always keep the repayment due date in mind and make sure you pay it.
2. Calculate how much is that cash back amount going to be, and check if it is even worth it.
3. See if there are any loopholes like "cash back only after a purchase of a certain amount".
4. Evaluate if you will be able to repay the money on time.
5. You don't save much with cash return schemes so, please don't shop more, unnecessarily.
You can enjoy the benefits of the cash back facility offered by the credit card companies, but that is only if you don't get carried away. Be rational and if you can plan well, then yes the cash back schemes can be lucrative.
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