In this article we explain what cashback actually is and how to benefit from it without falling into the trap.
What is cashback?
We can define cashback as a system through which you are paid a percentage of the money you spend when you buy certain products. In other words, a formula whereby stores and financial institutions get you to spend more money and you, as a user, save money on each purchase.
Cashback is not new. It is a tool that supermarkets have been using for years. It is also common to see it in credit cards as an added perk or advantage. What has changed now is that, thanks to technology and online shopping, the system has become more popular.
In fact, some browsers, like Opera, offer it directly, while others simply look for an extension of a cashback platform to benefit from it.
How does cashback work?
The way cashback works is very simple. Essentially, with this system you get back a part of the money you have spent. It’s as simple as that.
Let’s look at this with a example. Imagine you buy a 250 euro cell phone with 1.5% cashback. You will have to pay the 250 euros for the handset, but you will get 3.75 euros back.
Basically there are two different cashback models:
- Cashback in money, which has become the most common option. With this method, the money you have saved via cashback is put into your account at the end of the month. However, depending on the platform, you may need to reach a certain amount in order to receive the deposit.
- Cash back in gift vouchers or points. This is the most common formula in supermarkets with promos that accumulate in your savings check (some people do not consider this option to be cashback in its purest form). There are also many financial institutions and platforms that use it. This way you do not receive the cashback as money; instead, the amount is accumulated in gift vouchers that you can later use to shop in other stores affiliated to the platform, or as points that you can redeem for certain products.
How much can you earn with cashback?
The specific percentage of savings depends on each platform, store and product you buy. In the end, cashback is a promotional tool for brands and retailers, so they will increase the return on the products they are most interested in selling.
The percentage you usually get back ranges between 1% and 5% as a general rule, although there are special promotions where it can be more than 50%. It is more common for the refund to be greater when it is in the form of a savings check or points rather than as money.
Advantages and disadvantages of cashback refunds
The advantage of this purchasing model is clear: you can save money on each of your purchases.
In fact, used wisely it is a good way to save at the supermarket, for example.
However, it also has its drawbacks. There are two clear risks of cashback refunds.
The first and most common is that you may overspend and buy things you don’t need. Confusing bargains with savings is one of the classic failures when saving, and cashback is a way to encourage this.
In the end, it is very easy to buy things that you did not plan to purchase just because you get part of the amount back and you think you are saving when in reality you are not. It is also common to spend more than you thought for that refund. So, instead of buying the 250-euro mobile, you might end up with a 300-euro mobile, just because you have seen that they return 5% of the purchase price (15 euros).
This is something similar to what happens when you finance your purchases, you end up paying more than you had in mind.
The second risk of cashback is the hidden fees that many credit cards which use this model include. Saving 5% is fine, but not in exchange for paying maintenance fees, having to make a minimum monthly use of the card, paying a high interest rate or keeping revolving credit, for example.
That is why it is essential to review the terms and conditions of the card as well as the cashback program itself, in case it involves minimum spends to qualify for the cashback, for example.