How good are cash back schemes?

You must be aware that banks once again have begun to tout their cash back offers.

You spend on your card and you get a portion of that back in cash.

So let's say the cash back offer is 5%. That means, out of your total spend, you will be returned 5%.

Here's what you must look out for.

Where you are spending

You can't spend your money anywhere and everywhere. There will be listed shops, stores, restaurants etc that will fall into this category.

You spend money in these outlets and you get cash back. Spend at any other outlet and you get nothing back.

A bank, for instance, may make this facility available only for purchases made at department stores, spends on apparel, consumer durables, jewellery, watches, electronic goods and leather items. They may not include dining out (restaurants, pubs, coffee shops).

Also, check if your bank insists that the transaction be done only on their swipe machine.

For example, let's say you have an HSBC card. You shop at a store whose swipe machine has been installed by ICICI Bank.

You will not be able to avail of the cash back facility on your HSBC card. You will get it only on your ICICI Bank card.

Minimum cash spent

You won't get your money back for every single purchase (or spend) you make. You must spend a minimum amount.

ICICI Bank, for instance, insists that the minimum purchase amount should be at least Rs 2,000. Others may ask for less or even more.

So if you spend around Rs 1,500 in a restaurant that falls under the "approved list", you will still not get any cash back. You should spend at least Rs 2,000.

Moreover, check if the banks insist that you spend a minimum amount every month.

Let's say the minimum transaction is put at Rs 2,000 and the minimum amount you spend in a month must be at least Rs 6,000.

This means that you must have valid transactions (where at least Rs 2,000 is spent at a time only in the approved places) amounting to at least Rs 6,000.

So, if you just have two transactions amounting to Rs 2,500 each time, you will not get any cash back because you never touched the minimum of Rs 6,000.

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Maximum cash back

Now don't expect to spend and spend to get your money back. Ask the bank what the limit is.

Maybe the maximum you can get as cash back in one single month is just Rs 6,000.

So, even if you spend much more and are eligible to get Rs 6,500 back, you will still get only Rs 6,000.

ATM withdrawals

Sometimes, you are offered cash on the amount withdrawn from an ATM.

Let's say the bank offers you 2% of the amount withdrawn as cash back.

This does not really benefit you.

ATM cash withdrawals on your credit card are charged a transaction fee. Let's say it is 2.5% of the amount withdrawn.

You withdraw Rs 2,000 from your ATM and you get Rs 40 back but you pay Rs 50 as a transaction fee. So you end paying Rs 10 (instead of Rs 50), which is nice. But you don't make any money.

If you need cash urgently, use your ATM card or debit card. You don't pay a transaction fee on that.

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Revolving credit

Sometimes, the incentive is greater when you revolve credit.

Revolving credit means you pay just 5% of your total bill and carry forward the rest of the amount to the next month and the bank charges you a rate of interest.

So, let's say, if you carry forward up to Rs 1,000, the amount returned to you stays at 1%.

But, if you carry forward between Rs 1,001 and Rs 6,000, 1.15% of what you spent is returned to you.

This increases as you spend more.

This is dangerous because now not only are they enticing you to spend but even carry it forward. This is a surefire way to land up in debt.

Lesson to be learnt: Don't use cash, use your card. But don't use cash back as an excuse to spend on what you normally would not. Exercise discretion.