31

I went to a store and purchased a plastic bag (3 cents) and they allowed me to get $50 cashback and charged me $50.03 on my credit card. Later my credit card company gave me 5% cashback ($2.50) for this purchase. After paying off the credit card bill, I have a net gain of $2.47.

Of course, this amount I earned is small compared to the time and effort I put in, but I am still amazed that I can get free money this way. Where is my $2.47 free money from? Why will they give me free money?

Edit I forgot to mention that since I am a new user of this credit card, it will automatically match all the cashback I have earned at the end of my first year. So my $2.50 free money will become $5.00, which is quite significant since I have only made a $0.03 purchase.

4
  • Comments are not for extended discussion; this conversation has been moved to chat. Feb 24, 2022 at 11:40
  • Is there any company other than Discover that gives "free" cash back? If not, I think that detail should be added to the body of the question.
    – stannius
    Feb 25, 2022 at 17:00
  • 1
    Are you sure that the $50 was "cashback"? Usually if you got cash that way with a credit card, it would be a "cash advance" with a punishing interest rate.
    – Kyralessa
    Nov 8, 2022 at 13:49
  • 1
    @Kyralessa, see the answer below. It is called "Cash at checkout". discover.com/credit-cards/member-benefits/…
    – Zuriel
    Nov 8, 2022 at 22:07

4 Answers 4

43

Update: based on a discussion in the comments (thanks to stannius and OP for providing evidence), we've determined that this is specific to the Discover credit card for a promotion called Cash at Checkout. A summary of the details are:

  1. When completing your transaction you will be presented with a cashback option, only if you pay with your Discover card, and only if shopping at one of approximately 70 specific stores.
  2. The charge appears on your bill as a single charge from the store, as if you spent that much at the store. You are not charged a cash advance fee or interest rate like you would be if you used your credit card to withdraw cash from an ATM.
  3. You can take out a maximum of $120 per 24 hours, though stores may impose a lower limit if they want to.

Note it's possible, though IMHO unlikely, that you can still actually get the 5% cash back bonus rate when combined with the "Cash at Checkout" feature. Based on the terms (described below), it appears that portion of the transaction is excluded. The fact that this offer only happens with a Discover card and at specific stores, suggests that Discover could very easily know exactly how much of the transaction was cash back and could treat it differently, if they choose to. The terms and conditions of the 5% offer states (emphasis mine):

You will not earn Cashback Bonus on cash advances, portion of purchases paid with rewards, balance transfers, transfers from Discover® checking or other deposit accounts, illegal transactions or on any cash you receive in connection with a purchase at the point of sale through our Cash at Checkout feature.

My interpretation of that, and specifically the word "Bonus" means Discover does know, and instead you likely will only earn the normal 1% rate. (I suppose it's possible that it's even 0%, which would be fair if Discover also didn't charge the store the normal 2%-ish for that portion of the transaction).

Note the 5% promotion is time limited and has a cap on $1500 in purchases, so even if the 5% applies your arbitrage scenario would be capped at $75, and beyond that if the 1% applies it would be capped at approximately $36/month if you took out $120 per day. (And perhaps these numbers are doubled by the promotional cashback match for new customers in the first year.)

I think it's also worth mentioning that if you are using your card for this sort of arbitrage scheme, they could potentially shut it down for you. Their terms state:

We reserve the right to disqualify customers from earning rewards in the event of fraud, abuse of program privileges or violation of the Terms as determined by the sole judgment of Discover. Abuse of the rewards program includes, but is not limited to, repeatedly opening or maintaining account(s) solely for the purpose of generating Rewards or solely for the purpose of purchasing gift cards.

That seems to be more targeted to opening multiple accounts though; I doubt Discover would care too much about one person going to the store every day to take out $120. The store might care more than Discover does...

Original Answer: Note this portion of the answer still applies, in the rare occurrence when some stores increase the charge amount and provide cash back, or if you manage to still receive 5% cashback on the entire transaction with the Discover promotion:

Where is my $2.47 free money from?

Note, actually, your gain is the full $2.50 because you also got a garbage bag, which is presumably worth 3 cents. 🙃

A high volume store will pay, on average, about 2% of transactions in credit card processing fees, so about $1 of your gain came from the store. The other $1.50 came from the bank as an incentive to use the card. You can safely assume, that anytime a credit card offers more than about 2% cash back, either generally, or for specific categories, that this is an expense the bank is willing to pay to keep you as a customer. Think of it as a marketing and/or customer retention expense.

Side Note: it's somewhat rare for stores to add cashback to a credit card purchase for this very reason. Presumably the store knows this though, and since most people would come into the store and buy other stuff too, they can allow it across the board without too big of a hit to their bottom line.

2
  • Debit card fees were capped by law in the Dodd-Frank Act. Before that, they could and did scale with the purchase price.
    – stannius
    Mar 1, 2022 at 17:16
  • Comments are not for extended discussion; this conversation has been moved to chat.
    – JohnFx
    Jul 28, 2022 at 17:02
25

These kind of arbitrage situations occur frequently, but once found out they can close quickly. For one, I am surprised Save-A-Lot allows you to get cash back on a credit card. Normally these require a debit card transaction. However, these situations do come and go.

Where you charged as a cash advance by your credit card? You may want to check that.

The one loophole that I found was on cruise ships. You used to be able to go to the casino, ask for cash and it would be charged to your on board account. You could then have your on board account to be paid with your credit card. The opportunity for such is limited as you have to be on a cruise and now all major cruise lines charge a 3% fee to get cash from the casino cage even if you pay for your on board account bill with cash.

Such situations could be leveraged even further for using double reward points or bonus offers for new card members.

1
  • 3
    It's been a long time since I worked for a CC company and maybe things have changed, but it used to be that cash back was a violation of their merchant agreement.
    – Kryten
    Feb 24, 2022 at 21:19
9

Of course, this amount I earned is small compared to the time and effort I put in, but I am still amazed that I can get free money this way. Where is my $2.47 free money from? Why will they give me free money?

The card charged a fee to the merchant. The card company then used part of that fee to pay you to use the card.

Fees are one way the card company makes money. They also get money from annual fees, interest, and penalties/late fees.

Not all cards will give you x% cash back, or points, or miles on the "change" from a transactions, but some do. The best is when the store sees the $50 as a purchase and gives you points also.

1
  • Comments are not for extended discussion; this conversation has been moved to chat.
    – JohnFx
    Jul 28, 2022 at 17:03
2

Save A Lot paid transaction fees (which include a percentage of your total purchase) on the credit card transaction. That (and other people's interest payments) is where your cash back comes from.

4
  • Thanks! I do not see what Save a Lot benefits from this: it loses money on me.
    – Zuriel
    Feb 23, 2022 at 16:28
  • Probably few enough people take advantage of the loophole for them to notice or see the need to close it yet.
    – chepner
    Feb 23, 2022 at 16:29
  • I strongly suspect Discover must be giving the merchant a break on the fees or otherwise incentivizing the business to go along with this. "Cash back with purchase" is a deliberately implemented feature, not an accidental loophole.
    – stannius
    Mar 1, 2022 at 17:19
  • But does Discover get any other information about the transaction other than the total amount?
    – chepner
    Mar 1, 2022 at 17:24

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .