Understanding Cashback: An Easy Guide for Canadians

In the world of financial transactions, one term that often piques the interest of Canadians is “cashback”. It’s a concept that seems straightforward on the surface, but delving deeper reveals a complex landscape of benefits, options, and strategies. If you’ve ever wondered how cashback works, the smartest ways to use it, or which Canadian credit cards offer the best rewards, you’re in the right place. In this comprehensive guide, we will simplify and summarize everything you need to know about cashback, so you can make informed decisions and maximize your financial gains.

Table of Contents

• What is Cash Back?
• How Do Cash Back Credit Cards Work?
• The Smartest Ways to Use Cash Back
• Different Ways to Use Cash Back
• High-Value Redemption Options
• Understanding Foreign Transaction Fees
• APR Rates and Cash Back
• Is 3%+ Cash Back a Good Option?
• Cash Back vs. Reward Points
• Is Cash Back or Reward Points Better?
• How to Redeem Cash Back on Credit Cards
• Best Canadian Credit Cards for Cash Back
• Benefits of Cash Back
• Who Pays the Cash Back?
• Examples of Cash Back
• FAQ
• Conclusion

What is Cash Back?

Cashback is a financial incentive offered by credit card companies, where a percentage of the amount you spend on your card is returned to you as cash. It’s essentially a reward for making purchases using your credit card. Cashback can vary in terms of percentage, and some cards even offer fixed cashback amounts for specific spending categories

The Evolution of Cash Back: A Brief History

Cashback rewards, now a staple in the credit card industry, have an interesting origin story. The concept was first introduced in the United States in the early 1980s as a marketing tool by a pioneering bank. Discover Financial Services, a subsidiary of Sears, Roebuck, and Co., is credited with launching the first cashback credit card. Their innovation was groundbreaking, offering cardholders a modest 1% cashback on purchases. This marketing strategy quickly gained popularity and set the stage for a reward’s revolution in the credit card industry.

Over the decades, cashback programs have evolved significantly. As competition among credit card issuers grew, so did the allure of cashback rewards. Today, Canadians have access to a wide range of cashback credit cards, each offering unique benefits and cashback structures. These cards cater to various spending habits, making it possible for consumers to earn cashback on everything from groceries and dining to travel and online shopping. The evolution of cashback has transformed it from a novel idea into a powerful financial tool that helps consumers make the most of their everyday spending.

How Do Cash Back Credit Cards Work?

Cashback credit cards function like regular credit cards but come with the added benefit of earning cash rewards. Here’s how they typically work:

• You make purchases using your cashback credit card.
• The credit card company tracks your spending.
• At regular intervals, you receive a percentage of your spending back in the form of cash.

When is it OK for You to Cash Out?

Credit card users are typically not forced to use their cashback rewards on a monthly basis. Most cashback credit cards allow users to accumulate their cashback over time and redeem it at their discretion. In fact, there can be advantages to letting your cashback rewards grow before cashing them in:

Larger Rewards: Allowing your cashback to accumulate over several months or even a year can result in a more substantial reward. This can be especially beneficial if you’re saving for a specific goal or looking to maximize your cashback earnings.

Strategic Redemption: Some credit card issuers offer bonus incentives for redeeming cashback in certain ways or at specific times. For example, they might offer extra rewards for redeeming your cashback as a statement credit or for specific categories like travel. By waiting and strategically choosing when to redeem, you can take advantage of these bonuses.

Flexible Use: Accumulated cashback gives you flexibility in how you use it. You can choose to use it to offset a large credit card bill, fund a vacation, make a major purchase, or even invest it for future growth. The longer you wait, the more options you have for using your cashback.

However, it’s essential to be aware of a few key points:

Expiration Dates: Some cashback rewards programs have expiration dates on earned rewards. Make sure to check the terms and conditions of your specific credit card to understand any limitations on when you can redeem your cashback.

Interest Rates: While waiting to accumulate cashback can be financially beneficial, it’s crucial to avoid carrying a balance on your credit card. High-interest charges can quickly erode the value of your rewards.

Changing Terms: Credit card issuers can change the terms of their rewards programs, including cashback rates and redemption options. Be aware of any updates to your card’s terms and conditions.

The Smartest Ways to Use Cash Back

To make the most of your cashback rewards, consider these smart strategies:

Pay off your balance in full: Avoid interest charges by paying your credit card balance in full each month.

Choose the right card: Select a cashback credit card that aligns with your spending habits and offers high-value rewards in categories you frequently use.

Combine cashback with other perks: Some cards offer additional benefits like travel insurance or extended warranties; take advantage of these.

Different Ways to Use Cash Back

Cashback rewards are versatile and can be used in several ways:

Offset your credit card bill: Apply your cashback rewards directly to your credit card statement to reduce your balance.

Get a statement credit: Convert your cashback into a statement credit, effectively reducing your next bill.

Redeem for gift cards: Many credit card issuers allow you to exchange cashback for gift cards from popular retailers.

Cash it out: Some cards offer the option to receive your cashback as physical cash or a direct deposit into your bank account.

High-Value Redemption Options

While redeeming cashback for statement credits or gift cards is common, some credit cards offer high-value redemption options. For instance, you might be able to use your cashback for:

Travel expenses: Offset the cost of flights, hotels, or rental cars.

Investments: Put your cashback into a savings or investment account for long-term growth.

Charity donations: Some cards allow you to donate your cashback to a charity of your choice.

Understanding Foreign Transaction Fees

When using cashback credit cards for international purchases, it’s crucial to be aware of foreign transaction fees. These fees can eat into your rewards, making it less advantageous to use your card abroad. Look for cards that offer no foreign transaction fees if you frequently travel or make international purchases.

APR Rates and Cash Back

While cashback rewards are enticing, don’t forget to consider the annual percentage rate (APR) of your credit card. High APR rates can quickly negate the benefits of cashback rewards if you carry a balance on your card. Always aim to pay your balance in full to avoid accruing interest charges.

Is 3%+ Cash Back a Good Option?

Cards offering 3% or more in cashback can be highly attractive. However, the goodness of this option depends on your spending habits. If you spend heavily in the categories that offer higher cashback percentages, it can be a lucrative choice. Evaluate your spending patterns before committing to such cards.

Cash Back vs. Reward Points

Cashback and reward points are both popular credit card perks, but they differ in how they reward you. Cashback offers a straightforward cash return on your spending, while reward points can be redeemed for various items such as travel, merchandise, or gift cards. The choice between the two depends on your preferences and spending habits.

Is Cash Back or Reward Points Better?

Deciding between cashback and reward points comes down to personal preference. If you prefer the simplicity of cash, cashback is the way to go. However, if you enjoy redeeming points for travel or other rewards, reward points might be more appealing. Consider what aligns best with your goals and lifestyle.

How to Redeem Cash Back on Credit Cards

Redeeming your cashback rewards is typically straightforward. Most credit card issuers provide online portals where you can easily redeem your cashback for various options. Check your card’s website or contact customer support for guidance on the redemption process.

Best Canadian Credit Cards for Cash Back

Canada offers a variety of credit cards with cashback rewards. Some of the best options include:

• Tangerine Money-Back Credit Card
• Scotia Momentum Visa Infinite Card
• BMO CashBack World Elite Mastercard
• American Express SimplyCash® Preferred Card
• CIBC Dividend Visa Infinite Card

Benefits of Cash Back

Cashback credit cards offer several benefits, including:

• Savings: Earn money back on everyday purchases.
• Flexibility: Use your cashback as you see fit.
• Financial Responsibility: Encourage responsible spending and timely bill payments.
• Additional Perks: Many cashback cards come with bonus perks like insurance coverage or extended warranties.

Who Pays the Cash Back?

Credit card companies foot the bill for cashback rewards. They fund these programs as a way to attract customers and encourage card usage. Essentially, it’s a win-win scenario – you get cashback, and the card issuer gains a loyal customer.

Examples of Cash Back

To illustrate how cashback works, let’s consider a few examples:

1. Grocery Shopping: If your cashback card offers 2% cashback on grocery purchases, and you spend $300 on groceries in a month, you’ll earn $6 cashback.
2. Dining Out: Suppose your card provides 3% cashback on restaurant expenses, and you spend $200 dining out. You’ll receive $6 cashback.

Now, let’s address some common questions about cashback.

FAQ

Q1: What is the difference between cashback and reward points?

A1: Cashback provides a percentage of your spending back as cash, while reward points can be redeemed for various items or experiences, such as travel, merchandise, or gift cards.

Q2: Is cashback or reward points better for frequent travelers?

A2: Frequent travelers often prefer reward points, as they can be used for flights, hotels, and other travel-related expenses. However, some cashback cards offer travel perks as well.

Q3: How can I determine the best cashback credit card for my spending habits?

A3: Analyze your spending patterns and choose a card that offers the highest cashback percentages in the categories where you spend the most.

Q4: Can I redeem cashback for cash, or is it limited to statement credits?

A4: Many cashback cards allow you to receive cashback as physical cash or as a direct deposit into your bank account.

Q5: Are there any additional fees associated with cashback credit cards?

A5: While cashback credit cards typically don’t have specific fees for earning rewards, be aware of annual fees and foreign transaction fees, which can impact your overall rewards.

Understanding Cashback: In Conclusion

Arming yourself with knowledge about cashback is the first step toward making the most of this enticing credit card perk. With the right cashback credit card and a strategic approach, you can turn your everyday spending into a rewarding financial experience. So, why wait? Start exploring your cashback options today and enjoy the benefits of cashback rewards tailored to your lifestyle and goals.