By Tanya Kumbhat

It seems like the festival discounts, clearance sales and attractive combination discounts (Buy two get one free) was not enough, the wily marketing team of many industries have come up with another device to make our pockets light. According to Wikipedia, a cash-back reward program is “an incentive program operated by credit card companies where a percentage of the amount spent is paid back to the card holder”. One might wonder that in this cut-throat world , the existence of such a scheme might have some back-door implications but for most of us the words “cash-back” incites to a quick purchase. Money is more than just a medium of exchange to people; it represents security, power and control. Thus it a psychological implication that we desire instant gratification cash back seems pretty immediate. Credit cards are often seen as causing a dent in the bank and along with the cash back, it is quite lethal.

An example of such schemes in India is, Apple which has introduced cash backs on the iPhone 5C on various credit cards. If you use a Standard Chartered credit card, you could be entitled to about 10 percent cash back, while other credit cards like Citibank, HDFC and ICICI are entitled to about 5 percent cash back. Users of HDFC are entitled to 10% cash back on the purchase of Samsung Grand Neo.

Although both discounts and cash back serve to benefit the masses, they are not similar. Discount is usually given instantaneously before a bill or invoice is generated, but cash back gets reflected in the monthly statement of a card as a credit to the person who holds the card.

An example of how this works is, if A is to buy a phone that is priced at  Rs.10,000.  If you were entitled to a 15% discount on the phone, you would pay only 85% of its price which is Rs.8,500 and your  discount would be Rs.1,500. But in case of cash back, you would pay the full amount when you buy the phone(Rs. 10,000). However, your bank will credit Rs.1,500 to A’s credit card’s statement that is due after the purchase.

The number one rule to remember is to not sign up unless your repayment balance is full every month because the interest charges will be more than the benefits earned. Also the terms and conditions of the cash back should be understood because in most cases the offer is limited only to a short period and is available to those who spend beyond a set limit. Overspending is another risk as cash back rewards can tempt us to spend money when we otherwise would not. While cash back rewards are great for purchases you’d make anyway, spending on unnecessary goods strains your funds.

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 means you still spend money.

Making a decision on cash-back schemes sounds like work and it requires consideration of all the mentioned factors as well as reading the fine-print behind them. For irrational spenders, avoiding any kind of credit is the best course of action.

Tanya Kumbhat:

She is currently in her second year at Christ University pursuing a B.A degree in Economics, Political Science and Sociology. The biggest dream of her life is to learn something new every day so that at the end of her journey ,she can look back at a colourful and knowledgeable life. She is a voracious reader and is interested in current events. To start an interesting conversation, she can be contacted at tanyakumbhat123@gmail.com

Posted by The Indian Economist | For the Curious Mind