What is 'Cash Back'

Cash back can refer to two different kinds of card transactions:

1) An option available to retail consumers when, during a debit card transaction, the customer can request to add an extra amount to the purchase price and receive the added amount in cash. Cash back using debit provides customers a convenient method of obtaining cash when purchasing goods and services without having to make a separate trip to an ATM or bank.

2) A cardholder benefit offered by some credit card companies that pays the cardholder a small percentage of their net expenditures (purchases less refunds). Cash back benefits often provide the cardholder with the opportunity to choose from taking the cash, or using the "points" for purchases, travel (as with miles awards for air travel) or gift cards. Typically, cardholders must reach a certain points level to redeem for cash or other benefits. Some credit cards offer varying levels of cash back depending on the purchase. For example, a cardholder might earn 5% back on gas purchases, 2% on groceries and 1%on all other purchases.

BREAKING DOWN 'Cash Back'

1) An example of debit cash back as a convenience: a customer has to purchase groceries and take cash out of their bank. Rather than make two trips to the store and to an ATM, they buy their groceries with a debit card (which totals to $45), and ask for $20 in cash back. The $20 is added to the transaction, making it total $65, and is given $20 in physical cash from the till.

2) Cash back and merchandise or travel bonuses are offered by credit card companies as a means of attracting new customers, and keeping old customers. Often, the APR for cards with this benefit is higher than for those cards that do not offer a cash back incentive. As a result, these cards are usually more beneficial to card members who are able to pay balances off in full each month; otherwise, the interest and fees could outweigh the cash back benefit. While some credit card companies allow the cardholder to "withdraw" the cash or redeem the points at any time as long as a certain threshold has been met, other cards will issue cash back award checks one a year.

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