The benefits of cash back programs

One of the most effective ways for consumers to save money on purchases is through cash back offers. Since 1986, when Sears introduced the Discover Card and offered a small rebate on purchases, companies have incentivized consumers with cash back to use their credit cards to build loyalty and retain them.

The idea is simple enough: when using a cash back credit card or participating in a business’s cash back program, you earn a percentage of your purchase amount back in the form of cash or rewards. This becomes an ideal way to save money on expenses or to treat yourself to something via the company’s rewards program.

Credit cards first hit the public in the late nineteen-fifties. User adoption took some time, given that the first credit cards were actually mailed to unsuspecting consumers who didn’t even know what they were used for. Merchants were also in the dark. Within a decade, however, more businesses realized that credit cards would earn them more money, beginning an era of incentivizing consumers to use credit cards and shop at their stores. Big banks quickly jumped on the trend.

Offering cash back eventually became a standard incentive to garner loyalty and keep business flowing. Today, it’s one of the most popular offerings by credit cards and businesses—though it’s not without dangers.

How to earn cash back

There are a few different options for earning cash back.

The most popular is to use a cash back credit card. These cards offer a certain percentage of cash back on all purchases. Some cards offer higher cash back rates on specific categories like groceries or gas, usually in conjunction with certain retailers. To maximize cash back earnings, you want to choose a card that aligns with your spending habits and use it for as many of your purchases as possible.

Cash back programs are also popular. Such programs allow you to earn cash back when shopping at participating retailers. In order to participate, sign up for the program and link your credit or debit card. Whenever you shop at their list of retailers, you'll automatically earn cash back. Some programs also offer bonuses for reaching certain spending thresholds or for referring friends.

Beyond the financial benefits, cash back rewards programs offer convenience. Some credit card companies create online portals to track earnings and redeem rewards. Certain shopping portals let you click through to a retailer’s website before making a purchase, making the earning process seamless.

Buyer beware

As with other marketing techniques, however, cash back programs are often cash cows for the companies issuing them. Earning cash back on a credit card with a high interest rate might not be in your best interest, for example. Whatever earnings you receive will likely be wiped away by your interest payments. The same holds true for rewards programs that market large tranches of points while minimizing the pitfalls of falling behind on your balance.

Some cash back credit cards also have high annual fees or restrict the types of purchases that are eligible for cash back. As always, read the fine print before signing up for any financial service. Opting for a card with a seemingly high cash back rate might actually work against you in the long run.

The future of cash back programs

Wouldn’t it be great to earn cash back on all of your purchases? Such a future is possible, though the traditional credit card model won’t get us there.

Credit card incentives, be it cash back for spending or earning rewards points, are built inside of closed systems. What if the system these programs were built inside wasn’t closed, however? As with rewards points, what if you could get cash back from spending anywhere you shop—and if a card issuer didn’t offer such an open cash back program, you could easily find another that did?

This would force businesses to compete to really earn your loyalty—businesses that include traditional banks and the credit cards they issue. In truth, loyalty is a two-way street: the businesses you value should also value your business.

And so an open cash back program, that returns value back to you on all purchases, is an achievable goal. We just need to build it.