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Have you seen all the different credit card rewards that are given out nowadays?? Airline miles, gift points, vacation certificates, etc, etc, etc. My favorite of course, is the Cash Back Rewards.

Cash back rewards are simply rewards for spending more on credit cards. They are based on some percentage of the total spent each year, and usually come in the form of a check that you can deposit in your bank account.

I got to thinking about these rewards the other day and wondered "Why do credit cards give cash back to the user?" It wasn’t a hard answer to figure out, with a little searching, but some of the reasons were interesting.

How do I Love Thee, Let me Count the Ways

There are a number of reasons that credit cards reward their users;

• Competition - With so many cards out there, companies are doing everything they can to gain new customers and retain existing customers. The ultimate, of course, is to give some money to people (as money is the most sincere form of flattery).
• Cost of Acquiring New Customers - It takes anywhere from $150-$300 to acquire a new credit card customer, and the companies have to make up that expenditure in fees and interest charges before the customer becomes profitable to the company. The fees come from both the merchant and the cardholder, but the interest comes only from the cardholder. If someone gets a card, then immediately closes it, the company has actually LOST money on the deal. Thus, lots of incentives to keep and use the card are offered.
• Card Use Incentives - Along with retaining a customer, having that customer actually USE the card is important. No use,.. no fees/interest. Card companies would love for you to max out the card and pay over time (preferably at a high interest rate). To this end, you get the incentives above, and usually Credit Card checks to get ‘cash back’ (at a MUCH higher rate) in the mail. I can’t tell you HOW many of these checks have passed through the shredder here. I’ve stopped counting individual mailings and have just started aggregating them as ‘Redwoods of bills’. (I’m at 1.7 Redwood-equivalents as of this writing).
• Encouragement of Use - This one is a little different from the Card Use incentives. The aim here is to get you to use the card AS OFTEN AS POSSIBLE. That means the card companies want you to stop carrying cash and use CC’s exclusively; At the grocery store, the theatre, the coffee shop, restaurant, and gas station. Everywhere.  By replacing cash with credit card use, the Card companies get to charge the merchant fees for usage, sometimes as much as 3-4% of the purchase. Of course, what no one sees is that those fees come back to the consumer through (invisibly) increased prices.

Credit card companies aren’t stupid (mostly) and they’re not evil (particularly), but they are in the business of making money, and they do it quite well. New rewards, incentives, tricks, deals, dog-and-pony shows, and other marketing gimmicks are continually coming out with the aim to extract you from your money in the fastest, most pain-free way possible. Reminds me a little of Las Vegas.

Why the Cash Back Can be Your Friend

The reason I like cash back is because you can make quite a deal off of it if you have some discipline and plan carefully.

An example - I have an American Express card, and a Costco membership. The Costco membership is $80/year (executive membership) but gives back 2% cash-back. The American Express uses points (no cash back, but stay with me). I’ve gotten in the habit of using Amex all the time, and also pay it off at the end of each month.

I get a double whammy when I use my Amex at Costco, by getting 2% of the purchase price back, AND bonus points put on the Amex card. Since we shop at Costco quite a bit, this has paid for the membership for every year after the first, and usually nets us an extra $40 or so above that. Additionally I rack up enough points with Amex that I buy 3-4 expensive Christmas presents and have them shipped out to us for free. (The wife got a $160 Kenneth Cole purse last year that she LOVES).

If the credit card companies are going to reward me for using them, I’m all for it. AS LONG AS I CAN PAY THEM OFF EACH MONTH. I’ve seen pictures of all the wonderful HUGE buildings these companies have, If I’m paying for those through my spending habits, it only seems right that I should be reaping some of the benefits too.

What is the best ‘free’ gift or benefit you’ve gotten from a Credit Card?? We’d like to know. Leave us a comment and tell us.

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