Cash back is a great way to be rewarded for everyday purchases. However, most cash back programs are tied to credit cards, leaving many people left out. Fortunately, many banks and fintech companies have introduced cash back debit cards to ensure everyone enjoys the rewards.
Whether you’re avoiding credit cards because you’ve had credit issues in the past or want to control your budget, cash back debit cards let you earn rewards on eligible purchases, much like cashback credit cards.
Read on to learn more about cash back debit cards, how they work, the pros and cons, and where to get one.
What is Cash Back?
Cash back is a reward where you earn back a small percentage of the money you spend while shopping. You can earn cash back when you use your credit card or debit card to make everyday purchases, such as groceries and gas. The amount of cash back you earn may vary depending on your percentage and the card issuer.
Unlike traditional reward points, which you can redeem for gift cards, cash, or merchandise, cash back simply means “cash.” Cardholders may receive their cash back rewards through a direct deposit linked to a bank account, gift card, check, or as a statement credit.
Cash Back Debit Cards and How They Work
A cash back debit card is exactly what it sounds like 一 a debit card that can earn back rewards in the form of cash.
When you use your debit card to make purchases, you draw money directly from your checking or savings account. With cash back debit cards, you can only make purchases for the amount you have in your account. If you use more than what you have, your transaction may be declined. And if it goes through, you’ll have a negative balance, which attracts an overdraft fee.
Your card issuer will then credit your account with a cash back, which can vary based on the percentage.
An Example of a Cash Back Purchase
Cash back rewards operate on a percentage basis. For example, if your debit card offers a 2% cash back on groceries, and you make $200 in purchases, you’ll earn $4 back. While these rewards may seem small, they can add up quickly to hundreds of dollars over time.
How Are They Different from Rewards Debit Cards?
Cash back debit cards and rewards debit cards may appear to be the same at a glance, but they’re different.
One major difference between the two is how you get rewarded. With cash back debit cards, you only receive your rewards in the form of cash. When you spend money on your debit card, you earn a small percentage of the purchase as cash back. The specific cash back percentage varies depending on your card issuer and the purchase category.
On the other hand, debit card rewards offer various perks, including cash back, miles, points, or bonuses. In short, you’re not limited to one form of reward as with cash back debit cards. But, again, the rewards you earn depend on your debit card issuer.
Advantages and Disadvantages of a Cash Back Debit Card
Cash back debit cards come with pros and cons. Understanding the upsides and downsides of these cards will help you make an informed decision.
Advantages
- Cash back rewards: The main advantage of cash back debit cards is the ability to earn rewards on your everyday purchases. Depending on the card, you may be able to earn cash back for every dollar you spend or at a flat rate, such as 1.5% on all purchases. Some debit cards offer high levels of cash back on specific categories, such as groceries and gas.
- Can help limit debt: Unlike credit cards that allow you to carry your balance month to month, debit cards require you to have money in your account to complete a transaction. This is especially helpful if you want to avoid debt and high-interest charges that come with credit cards.
- No annual fees: Many cash back debit cards do not charge annual or monthly fees. That means you won’t have to sacrifice your rewards for a fee. There’s also no interest, and you can avoid other additional fees if you use the card responsibly.
- Potential for sign-up bonuses: Like credit cards, many cash back debit cards offer welcome bonuses. However, you must meet a certain minimum spending requirement within the first months of opening the account to earn the bonus. When you do, the sign-up bonus you get may be a great start to growing your cash back earnings.
- Convenience: Cash back debit cards are widely accepted. You can use it for online and in-person purchases, making it a convenient payment method.
- Other benefits: Checking accounts that offer cash back debit cards also provide other benefits, such as waived overdraft fees, ATM fee reimbursements, and high annual percentage yields (APYs).
Disadvantages
- Limited rewards: Cash back debit cards typically offer limited rewards compared to rewards debit cards and credit cards. You may only be able to earn a small percentage of cash back on your purchases, which may not be worth it.
- Limited redemption options: Cash back is the primary redemption option for most cash back debit cards. If you’re looking to earn a wide variety of rewards, such as points, miles, and bonuses, along with cash back, a rewards debit card may be a better choice.
- Lower fraud protection: Debit cards offer less fraud protection compared to credit cards. If your card is stolen, you could be responsible for fraudulent charges, depending on how long you take to report it to your bank. According to the Federal Trade Commission, if your debit card is stolen and you notify your bank within two days, you could be responsible for up to $50. If you notify your bank after two business days, you may end up paying up to $500 in fraudulent charges.
- Limited consumer protection: Debit cards offer limited consumer protection compared to credit cards. For example, if you need to dispute a charge on your debit card, it may take longer to resolve the issue than a credit card dispute.
- Overdraft fees: With a debit card, it’s possible to overdraw if you don’t keep a close tab on your account balance. If this happens, you’ll have to pay an overdraft fee, which can be very expensive. However, you can opt out of the service if you don’t want to incur such fees.
- Hidden fees: Some cash back debit cards have hidden fees that may limit your cash rewards.
Who Provides the Cash for Cash Back?
Banks and financial institutions typically offer cash back debit cards. The cash that’s given back to customers when they use the card is usually funded by their bank as a way to incentivize them to use their debit card instead of cash or other forms of payment. This cash may be generated through various methods, such as from the interchange fees charged to merchants for processing debit card transactions.
Some banks may also partner with retailers or merchants to offer cash back rewards for specific purchases made with a debit card. When you make eligible purchases with your bank’s retailer partners, you earn a small percentage of the purchase amount in the form of cash back. This percentage usually varies based on the retailer and the category of purchase.
For example, a bank may offer 3% cash back on all debit card purchases made at a specific grocery store. In this case, the cash back reward is offered by the bank, but the partnership with the grocery store helps promote the use of the card.
Do All Stores or Merchants Offer Cash Back?
Not all stores or merchants offer cash back on debit card purchases. Cash back is typically offered by retailers who can process debit card transactions. Some small businesses may not have the infrastructure to provide cash back, while others may choose not to offer it due to security concerns.
While many stores offer cash back, it depends on the individual store’s policy. Some stores require a minimum purchase amount to qualify for cash back. For example, you may want to spend $200 to earn debit card cash back on your purchases.
In most cases, you won’t have to pay a fee for cash back withdrawals. However, some stores may charge a small fee for the service, typically a percentage of the requested amount.
Merchants and stores have the freedom to decide how much cash back they’re willing to offer. However, it’s important to check with the store beforehand to see if they offer cash back and if there are any applicable fees or restrictions. Many stores that offer cash back will display a sign at the register indicating the availability of the service.
