What are Rebate Credit Cards?

There are many cards that offer something in addition to the opportunity to have credit. There are credit cards set up for worthy causes, such as to donate to favorite charities, to alma maters, and to college funds. There are also credit cards that allow you to earn points or miles or some other incremental item that you can—when you reach various levels—exchange for a variety of rewards, including merchandise, airline travel, hotel stays, and gasoline.

A rebate card is a bit different than these. A rebate is a deduction from the amount to be paid or the return of some of what is paid. It comes from the French word rebattre, which means “to reduce.” Thus a rebate credit card is understood to mean one that pays you back in cash.

Where Does the Rebate Come From?

You buy a product from a merchant for, say $100. You pay your credit card bill when it’s due, and you pay $100, which exactly covers what you owe the merchant. Where does the money to pay you a rebate come from?

The cardholder and the card issuer are only two parts of the equation. The third corner of this triangle is the merchant. So let’s look at the merchant’s side of the transaction for a moment. Credit cards give merchants more security than transactions using checks, and in return for this security, merchants pay a commission, called the discount fee, to the credit card issuer. The discount fee may be the sum of a flat fee per transaction and a percentage of the transaction. Assuming that there is no dispute or other issue, the merchant does not, in fact, receive $100 through the credit card issuer for your $100 purchase. Rather, the merchant receives $100 minus the discount fee.

The discount fee, along with late fees, interest, and any annual fees, are some of the ways that card issuers make money. And because there are now so many, many types of credit cards, one of the ways that credit card issuers have decided to go about inspiring and feeding customer loyalty is basically sharing the discount fee with the card holder.

How Are the Rebates Distributed?

First, as we mentioned above, rebate cards are a particular type of credit card. So characteristically, the card issuer will advertise a card with a particular set of rebate features. Typically these features will include:

• an introductory rebate percentage that may change after a specified time period to a lower percentage;
• a pay-out plan that may see you receiving a rebate month, quarterly, or annually, although one UK credit card issuer reportedly pays back instantly;
• an open-ended plan or a limit to how much cash back you can earn within a specified period;
• the rebate sent to you in the form of a personal check or applied to the balance of your credit card account; and
• specifications about the types of purchases to which discounts apply, with some purchases potentially receiving greater cash back percentages than others, and some purchases potentially receiving no cash back percentage at all.

Tiered Payback Schemes

Though not all cash back cards have a tiered scheme, the final bullet above includes a description of one  tiered cash back scheme. Actually tiered cash back schemes can work in two different ways. First, you may receive a higher percentage of cash back after achieving a certain level of spending. Second, their can be tiers from the outset in terms of what percentage items purchased from certain merchants earn, creating a tier among products.

In the first type of system, the card will serve you well if your normal spending will take you into the bracket in which you will receive the highest cash back percentage, or if you are in a situation in which you need to make an especially costly purchase. In the second type of system, the card will serve you well if your needs are a good match for the cards particular set of higher-paid products and services. Since cards vary in the number of levels, the percentages offered at each level, and—in the second case—in the specified products that earn higher percentages, it pays to have a good look around to ensure that the card is a really good match for your lifestyle and needs.