Cashback credit cards: What are they and how do they work?

Cashback credit cards are becoming popular among youngsters who want maximum returns from their spending.

 

“Cashback credit cards reward cardholders by returning a percentage of their spending as cash. Typically, these cards offer a set rate on purchases, though some give higher rewards for specific categories like online shopping. Once accumulated, cashback can often be redeemed as statement credits, direct deposits, or gift cards,” said Prashant Kumar, Founder and CEO, Kredit.Pe. 

 

Types of cashback credit cards 

 

There are several types of cashback credit cards, each with distinct reward structures:

 

Flat-rate cashback cards: These cards offer the same cashback rate on all purchases.

 

Tiered cashback cards: These cards offer different cashback rates based on the category of spending. 

Choose-your-own-category cards: Some cards allow users to select their bonus categories from a list each month. This flexibility can maximise rewards for savvy spenders.

 

Popular cashback categories

 

>Grocery and departmental stores.

>Online shopping on platforms like Amazon and Flipkart.

>Fuel purchases at petrol pumps.

>Restaurant and food delivery.

>Utility bill payments.

 

“Some cards also offer special bonuses or higher cashback rates for certain spending thresholds. While cashback cards are simple and convenient for saving money, verticalised cards like travel, e-commerce, UPI credit cards offer higher value back to users in their respective spending categories,” Prashant said.

 

Financial advisors recommend several strategies to maximise cashback benefits:

 

>Match the card to your spending patterns

>Keep track of category-specific reward rates

>Watch out for promotional cashback offers

>Pay bills in full to avoid interest charges

>Review and redeem cashback regularly

 

Cashback credit cards also have some drawbacks: 

 

Annual fees and high annual percentage rates: Some cashback cards come with annual fees or high-interest rates that can negate the benefits if balances are not paid in full each month. 

 

Spending limits: Many cashback programs have caps on earnings or require users to meet certain spending thresholds before rewards can be redeemed. 

 

Encouragement of overspending: The allure of earning cash back might tempt some consumers to spend more than they normally would, leading to potential debt issues.