A credit card company offers 5% cashback in rotating categories every quarter. For example, from April to June, you get 5 dollars back for every 100 dollars you spend in a particular category, say home improvement stores. On the other hand, I have also noticed that for returned products in this category, you only lose 1% of the cashback.

Image a person buys a product that worths $1000 from a store (and therefore earns $50 cashback) and immediately returns the unopened product (and therefore loses $10 cashback). Then he can basically get $40 for free. Of course, the credit company sets a limit on the cash back every quarter and thus no one can get unlimited money this way.

My question is, is the practice described in the paragraph legal, or is it considered fraud?

1 Answer 1


Of course, the credit company sets a limit on the cash back every quarter and thus no one can get unlimited money this way.

That's why it's "legal". But that's not the correct term to use for what's going on. Yes, it's legal under general banking and finance regulations for banks to make cashback offers like that, even if it appears they lose money. A bank isn't going to run a cashback program that is illegal; they'd lose their banking license. What's the sense of that? They're not going to run a cashback program that looses them too much money, either.

A better way to think of the cashback system and the way to game the system of 4% by returning purchases it is to realize that it allowed under the Terms of Service of the credit card and issuing bank. They get people to sign up for cards and use them by enticing them with money. And the bank has set a limit to the total cashback each quarter; the bank is smart enough to make terms that have no loopholes, yet still make them money.

And, if you read the Terms, I'm sure there is a clause that says the bank can change the terms at any time, and you agree to those terms by default or by simply using the card. The bank can decide at any time to stop the program for certain customers if they abuse it, i.e. try to max out the cashback each quarter.

So the idea of this being illegal or fraud isn't the case here; the idea is that it is legal as the bank sets their cashback rules under federal and state regulations, and can change them, when needed.

  • 1
    Thanks for the detailed answer! I am sure that it is legal for the bank to run the program but I am wondering if it is legal for the customer to "misuse" the cashback and get some free money every quarter without making "real" purchases.
    – Zuriel
    Jun 1, 2021 at 3:47
  • The bank has fully calculated the possibility that people will legally abuse the system. Jun 1, 2021 at 3:52
  • Whether this practice is permitted or not under the contract could also be debated as a matter of contract interpretation that I think could go either way.
    – ohwilleke
    Jun 1, 2021 at 3:56
  • @ohwilleke Could be; depends on the exact wording. Jun 2, 2021 at 0:52
  • Some years ago, you could earn air miles with some credit card by getting cash from an ATM using the credit card. One couple put their life savings in the bank. Drew out everything using their credit card. Took the notes (about $20,000) and put it straight back into the bank. Drew out everything again. They managed to draw 7 million dollars out of their account over a few months and put it all back in, gaining seven million air miles. Totally legal. The credit card company changed their terms.
    – gnasher729
    Jun 2, 2021 at 10:59

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