With a cash-back credit card, you receive a refund of a portion of your purchases as cash applied to your account. This is usually a small percentage of what you charge. This can be a money-wise bonus for using a given card. In fact, recent research shows that 68% of Americans have this kind of card in their wallet.
If you’re thinking about adding a credit card to your wallet or want to maximize your savings with the one you have, read on. Here is what you should know about cash-back rewards, including how cash-back rewards work, and whether this type of rewards card makes sense for you.
Key Points
• Cash-back credit cards refund a small percentage of purchases as cash.
• Rewards often range from 1% to 2%.
• Some cards offer higher rewards in specific categories.
• Rewards can be redeemed as balance reduction, charitable donation, or direct deposit.
• It’s important to pay off the cash-back credit card’s balance monthly to avoid interest.
What Are “Cash-Back Rewards”?
Cash-back credit cards are offered by many credit card companies to qualified consumers. Consumers can use these credit cards to make purchases, and a certain percentage of that purchase is returned to the customer as a cash incentive. In other words, cash-back rewards can be an easy way to make the most of everyday expenses.
Typically, cash-back rewards range between 1% and 2%; however, a few cards offer more.
There are different types of credit cards, and rewards cards can vary. Some rewards cards offer a set number of points per purchase that can be redeemed later for cash or for goods like airline tickets, discounts at coffee shops, or gift cards.
How Does Cash Back Work?
Cash-back rewards are easy to use. All that consumers have to do is spend as they normally do, and in return, the credit card company calculates the percentage to return to the cardholder based on what they spent on eligible purchases.
For example: A card pays a flat rate of 2% cash-back on all purchases. If the cardholder spends $1,000 in a statement period, the card issuer will then give the cardholder $20 in cash-back rewards. Some more details to consider:
• Some cards will raise the percentage refunded for certain categories for a limited time. For instance, during one quarter of the year, you might get a higher percentage back on gas purchases, and then for the next period, a higher percentage back on travel expenses. (More on that below.)
• The card issuer pays out the percentage at the end of a given term, which could mean paying it out at the end of a statement period or billing cycle, or even once you hit a predetermined amount, like $20.
• Cash-back cards might come in handy for everything from large purchases to everyday needs. Think of it this way — rather than purchasing things with cash, which doesn’t provide any added benefits, a cash-back card could return money right into a consumer’s pocket.
However, in order for that money to really pay off, the cardholder will likely want to pay off the credit card balance every month in full so they’re not accruing interest and fees, and negating that cash-back reward.
One thing to remember is that cash-back cards are different from other rewards cards. There are rewards cards that offer specific travel rewards, cards that partner with gas stations to earn free gallons, and many more.
Four Ways to Redeem Cash-Back Rewards
Depending on the cash-back card, there may be a number of different ways you can redeem cash back rewards. Here are some commonly offered options.
1. Credit card balance reduction: This allows you to have your cash rewards applied to your balance and use them to pay off a portion of your monthly bill.
2. Gift cards: Some card issuers allow you to redeem your cash-back rewards in the form of gift cards to your favorite retailers or restaurants. To sweeten this deal, some issuers partner with other companies, such as online retailers or airlines, to provide bonus payouts when cash-back rewards are redeemed with a gift card.
3. Charitable giving: Several card providers allow users to use their cash back for good, sending their rewards directly to the charity of their choice. All that users need to do is select the charity, and the card does the rest.
4. Paper check or direct deposit: You can often redeem your cash back as just that — cash. In this case, you ask your card issuer to transfer the money directly to your bank account or send a paper check.
The Different Types of Cash-Back Cards
While cash-back cards all work in a similar way, there are some differences between these cards to keep in mind.
• Some are flat-rate cards, which means that cardholders receive the same exact cash-back percentage on every eligible purchase, be it groceries or plane tickets. This option is easy as users never have to think about the way they use their cards.
• Another option is a bonus category cash-back card. These cards offer higher cash-back percentages on certain purchase categories. For example, you might get more cash back on gas and groceries (say 2% or 3%) than you do on other items (say 1%). If you opt for this type of card, it can be a good idea to make sure the higher variable percentage is for items you purchase often.
Note: Just be careful that these promotions don’t encourage you to spend more than you planned just to get that cash-back bonus. That could drive up your credit utilization ratio and ding your credit score.
• Some cards rotate these bonus purchase categories every quarter, and you need to activate your rotating bonus categories in order to earn rewards. Others allow you to choose your bonus category.
Any of these cards may offer additional features, such as:
• Special promotions One way to earn even more cash back may be via a special promotion run through the credit card. For example, a credit card may typically offer 1% cash-back. However, for one billing cycle, it could partner with a large retailer for 5% cash back for all eligible purchases.
• Sign-up bonuses Cash-back rewards cards might also come with sign-up bonuses to attract new customers. This might be a certain lump sum of cash back (say $100) if you spend a certain amount in the first three months. Or, you might be able to earn double or triple cash back for a set period of time.
Potential Drawbacks of Cash-Back Rewards
Cash-back credit cards can come with a few potential downsides that users may also want to be aware of. As with signing up for any new credit card, it’s a wise idea to read the fine print.
For instance, you may want to be sure to read through the contract carefully to understand exactly how the rewards work, what to expect along the way, and also suss out any hidden credit card fees such as late payment fees, balance transfer fees, foreign transaction fees, and more.
It can also be a good idea to find out if the card has a high annual fee, which may negate any earned rewards, and what the APR (annual percentage rate) is, in case you get into a bind and need to carry over a balance month to month. However, it’s key to keep in mind that carrying a balance nearly always outweighs any rewards.
It’s also important to note that many credit cards (cash-back or otherwise) can retain the right to change their bonus structure at any time. That means it could change the percentage of cash users receive in return for purchases for a lower (or higher) amount. So, users might want to be happy with the card and its rates and policies, not just the cash-back rewards, as that could change at any moment.
When looking at the fine print, consumers might also want to identify if the card comes with a cap on possible rewards. Many cards limit just how much money a user is allowed to claim, so make sure to know that number and be comfortable with the limit.
And, again, like all cards, it’s key to pay off a cash-back rewards card in a timely fashion. This way, users won’t be paying interest on purchases with a card that was meant to bring them a little money in return.
Recommended: Understanding Purchase Interest Charges on Credit Cards
The Takeaway
Cash-back is a credit card rewards benefit that refunds the cardholder a small percentage of some or all purchases made with the card. Every time you make an eligible purchase with your cash-back credit card, your card issuer will pay you back a percentage of that transaction. Your cash-back reward won’t necessarily pay out immediately. Like your statement balance, your rewards will accrue each month and show up on your monthly statement.
Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.
FAQ
How do cash-back cards work?
With cash-back rewards, you receive a small percentage of a purchase price back as a refund on your credit card account. Some credit card issuers may offer higher percentages in certain categories for a limited time.
Is cash back just free money?
While cash back may feel like free money, it’s actually just a small discount on your purchases. That’s a nice perk, but you are still spending money on credit that needs to be repaid.
Is cash back from a credit card a good thing?
Cash back is a nice perk to enjoy as a credit card holder, but keep in mind that cards offering this reward may charge higher interest rates than those that don’t offer this feature.
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