Deciding on what credits cards to apply for can be an intimidating process for many consumers. Cashback credit cards always sound enticing--who wouldn't like to get a check back at the end of the year based on the amount of purchases they made during the year? That seems like free money. Of course, one of the principle tenets of business is that there is no free lunch.

Those who choose to use cashback credit cards should be aware that there are likely to be added costs that help the issuing bank recoup the money paid to the consumer in cash payments. However, the terms used by cashback cards can vary widely, and those who understand exactly how the rewards programs work can structure their use of the card to take maximum advantage of the cashback credit card's account structure.

The earliest cashback credit cards used a very simple flat percentage method of calculating cash back rewards. These programs typically specified a small percentage (normally one percent or smaller) of the total amount of purchases made on the card that would be returned to the consumer in the form of either a cash payment or a balance credit. However, many of these flat rate programs have changed to become based on tier based approach.

This means that those who charge only a small amount on their cashback credit cards receive only a small percentage of their purchases back as cash, whereas large spenders receive a higher percentage of their balance back. This has several advantages for banks that issue cashback credit cards. In the first place, it lets them trumpet the generous amount of money that they return (stating only in the fine print that the rewards level varies with usage). Second, it encourages users to use their card more, and therefore pay more interest fees, if they want to get a higher percentage of their purchases back as cash by charging enough to move up to the next tier.

Cashback credit cards also have different methods of dispersing cash back rewards. Some of them will automatically cut the consumer a check at certain times of the year, whereas others will automatically apply the cash back reward to the outstanding balance. Some cashback credit cards require consumers to specifically request their cash back rewards. It is important for all consumers to fully understand how their cashback credit cards work and what they have to do to receive their rewards.