How Does Cashback Work?

Most American credit cards use the point system. One point is one cent. You accumulate points. Then you can use these points for things like booking flights, hotels, or buying gift cards or Apple products, etc.

Let's say the cash back is 1% and you spend $1,000 last month. This month, you will receive 100 points. You can redeem this for $10. Most cards have programs where points are worth more if you use it for different things. For example, my credit card gives a 50% bonus when buying flights using the points. So the $10 is worth $15 if used for it.

For every card I've had, it builds up in a separate pool, and every so often you either have it deposited to a bank account or applied as credit toward the bill.

The cashback money is funded in two ways:

1. Increased fees that the banks and networks charge merchants. This increases prices for goods and services for everyone, regardless of how each individual customer pays.

2. Interest payments and fees paid by people who don't pay off their cards every month. This includes a whole range of people, but is often those who can least afford it.

The whole system is unsustainable, and I don't use cashback cards.