Today we feature Michael, who is an economics major with a passion for finance management and helping you find your way through the intricate modern financial system. He also enjoys travelling and pursuing amateur photography in free time.
The world of finance is quite volatile, and experts know that almost nothing is certain — apart from the fact that everyone who’s in the business wants to make some money. And that’s true for everyone from banks to credit card companies.
However, plenty of companies that offer lines of credit through credit cards offer seemingly illogical incentives. For instance, the cashback rewards for purchases with your credit card. If you’ve entered the credit system, you’re probably bombarded with both email and physical mail offers that promise incredible incentives.
There are plenty of different offers of this kind — from constant cashback deals that give you rewards every time you make a purchase with a card, to low-interest rates for new customers.
But these days, even after the end of that introductory period, plenty of banks actually keep offering cashback offers that are seemingly just too generous to make sense. CIBC Dividend Visa Infinite is a good example because they offer a whopping 5 percent rebate; the same is true for a Scotia Momentum Visa Card. Keeping that in mind — how can credit card companies offer deals that are this lucrative and keep maintaining a profit?
The Fine Print
As with most things in life, the devil is in the details. When you sign up for a program that involves cash back incentives, make sure you read the details of the deal in the fine print. For instance, a majority of these rewards programs don’t have limitless bonuses; there’s usually a quarterly or an annual budget.
So, sure, you may get a 5% cashback on paper — but there’s a yearly limit to how much you can make use of this. There could be other limitations that aren’t clearly advertised as well. For example, some programs only give you cashback for specific purchase categories — like gas stations or restaurants.
Going back to our previous specific example — the Canadian cash back cards that we’ve mentioned do offer 5% cashback for purchases made using it. However, a cardholder agreement from 2018 shows that this is only true for very specific purchase categories — these change each quarter as well, so you can’t make long-term plans based on this.
Plus, you’re limited to an average of $1,500 worth of purchases each quarter — meaning a $6,000 limit on a yearly basis. There are additional limitations that some people may have problems with. As an example — plenty of people use NFC technology to make payments with their phones or smartwatches instead of their actual cards.
Unfortunately, this card does not allow counting Google Wallet (and other assorted NFC payments) towards points on this program.
Other cards have a similar set of limitations as well. And that’s one of the reasons why cashback rewards aren’t a hefty cost for credit card companies. When all is said and done, the limitations from the fine print mean that only a small number of purchases are eligible for the bonus.
And naturally, the advertisements don’t show this discrepancy; which is why many people opt for opening a line of credit under the wrong impression. In reality, cashback rewards aren’t nearly as universal and generous as you might assume.
No Free Lunch
You should also know how the relationship between a vendor and a credit card company works in order to realize that the latter doesn’t actually give you free money.
When a vendor accepts payments made using a specific credit card, the merchant actually pays a small part of the paid amount back to the credit card firm as a transactional fee. In most cases, this fee is precisely where the money for your cashback rewards comes from. So, a credit card company or a bank just gives a part of that transaction fee to the consumer.
The point here is to provide the biggest possible incentive for people to pay for things using a credit card rather than debit cards or cash; these two give them absolutely no rewards. When people use credit cards, the companies that issue them make their profit off the high-interest rates; in addition to things like late fees from balances. And the more you use your credit card in daily life, the likelihood of a missed payment becomes bigger.
In fact, a survey conducted by the Bank of Canada points out that almost half of all owners of credit cards carry some of their balance over into the following month. And naturally, the credit card companies that advertise the most enticing rewards programs also have the biggest interest rates and late fees.
Compared to the amount of money they make, the limited cashback rewards are simply a laughable expense.
So, the question is — are cashback rewards worth it for you as a consumer. The reality is that you’ll probably use your card in the same way even if they didn’t exist. And when they do and you take care to read the fine print; you’ll be aware of their limitations and do your best to maximize the cashback that you receive.
Still, you shouldn’t think that credit card companies lose money simply because cashback rewards seem so enticing. They can definitely aid specific customers to save some of their credit. But, once you see the qualifications and restrictions that aren’t clearly spelled out anywhere except in the fine print — you will realize that these programs simply aren’t as overly generous; at least not as much as they first appear. We hope that this guide was of use to you and that you have learned something new today. Most of all, make sure that you are staying safe in these times we are going through. Have a good one, guys!