How Does Cash Back Work?

Cash back refers to a rewards program where you receive a percentage of the amount spent on purchases as a return. Typically, you earn these when you make purchases using cash back credit cards. You can redeem them multiple ways, but the most common ways to redeem them are as cash or as a statement credit. This differs from points-based rewards programs where you earn points instead of actual cash; you get points you can later redeem for various items such as merchandise, travel, gift cards or experiences.

Cash back is ideal for regular shoppers looking to get more value from their spending habits. If you use your credit card frequently, understanding cash back could help you save money on your everyday expenses.

Cash back credit cards are a type of rewards credit card that offers a percentage of your spending back as cash rebates or statement credits. The amount you get is referred to as cash back. This is a fixed-percentage value and varies from one card to the next. They are a popular choice for many consumers because they provide a simple and tangible way to earn rewards on everyday purchases.

If you get a credit card offering 2% cash back on all purchases, you’ll get $2 for every $100 you spend. For example, if you make a $950 purchase, you get $19 as cash back. Depending on your card, you’ll receive the accumulated cash back at the end of the billing cycle or the year's end. So, if you’ve spent $5,000 in a billing cycle with the same 2% cash back card, you’ll get $100 as cash back.

There are many cash back credit cards out there, but not all work equally well for you. Sure, they offer cash back and work like regular credit cards, but the cash back you stand to earn varies depending on the card you get. For instance, you may earn higher cash back when you spend across specific categories such as dining and gas.

While there are different types of cash back offers out there, they can generally be categorized into three:

Flat-rate cash back credit cards are designed for individuals who prefer a straightforward, uncomplicated rewards structure. These cards offer a fixed cash back percentage on all purchases, whether it's on dining, groceries, gas or travel.

Examples include the Wells Fargo Active Cash Card, which offers 2% cash back on all purchases, and the Bank of America Unlimited Cash Rewards Credit Card, which comes with 1.5% on all purchases. With the Citi Double Cash Card, you earn up to 2% cash back — 1% when you make purchases and 1% when you make your payments on time.

The downside of getting a flat-rate cash back card is that you won’t be able to fully maximize earnings, especially if you tend to spend more on certain categories.

Flat-rate cash back credit cards are best suited for:

• Simplicity lovers: Individuals who prefer a straightforward rewards system without the need to track spending categories.
• Consistent spenders: People with uniform spending habits across various categories, ensuring they always earn cash back.
• Everyday users: Those looking for a single card to use for all purchases, earning a consistent cash back rate.
• Budget-focused individuals: Consumers who want to earn rewards without worrying about annual fees or complicated reward structures.

With such cards, you earn higher cash back on spending across specific categories. Purchases that don’t qualify under bonus categories still earn basic cash back.

For instance, the Savor Rewards Card from Capital One offers 4% cash back on dining, entertainment and popular streaming services and 3% at grocery stores. The Chase Freedom Unlimited Card offers 3% on dining and drugstore purchases.

If you spend more on certain categories than others, a cash back card with bonus spending category is the way to go. However, take note of any spending limit your card may have. Some cards give a lower rewards rate after hitting a spending limit.

Bonus category cash back credit cards are ideal for:

• Targeted spenders: People who frequently spend in specific categories (like dining, groceries, or travel) that align with the card's higher cash back rates.
• Maximizers: Those who enjoy optimizing their rewards by using different cards for different types of purchases to get the best return.
• Strategic planners: Individuals who can plan their major purchases around the card's bonus categories to maximize rewards.
• Adaptable consumers: People who are flexible with their spending and can adjust to utilize the card's bonus categories effectively.

These cards offer higher cash back rates on rotating spending categories — either every quarter or billing cycle — which cardholders typically need to activate in advance. There's usually a limit on how much spending earns the higher rate.

Chase Freedom Flex Card and Discover it Cash Back Card offers 5% cash back per $1 spent up to $1,500 on bonus categories you activate each quarter. Discover it Cash Back Card also offers 5% cash back up for categories you activate with the same spending limit.

The Citi Custom Cash Card automatically offers 5% cash back on up to $500 spent in your highest spending category each billing cycle, with no need to select categories in advance.

While cash back credit cards with rotating (and bonus) category spend seems tempting, it requires a lot of work. In some cases, you’ll need to activate a category in advance for you to be eligible to the higher rates. If you don’t mind monitoring your spend and do the extra work, you’ll find rotating cash back credit cards worth it.

Rotating category cash back cards are ideal for:

• Flexible spenders: People who can adjust their spending to align with the changing categories.
• Strategic planners: Those who don't mind planning their purchases to maximize cash back rewards.
• Engaged consumers: Individuals who are attentive and willing to activate the categories each quarter.
• Diverse shoppers: Those with varied spending that can match the rotating categories throughout the year.

Since cash back cards work differently in how they offer cash back, you might benefit by using more than one card to maximize your cash back earning potential. Here’s what you need to do to make the best possible use of your cash back credit cards.

1. Use a bonus or rotating category card each time you make a purchase from any of the applicable categories.
2. Use a flat-rate cash back card when you’re making purchases that don’t fall under any bonus categories.

Using a flat-rate card for purchases that don’t earn bonus cash back is a good idea because cards that offer higher cash back rates on particular categories tend to limit their cash back for regular purchases to 1%. With flat-rate cash back cards, you may earn up to 2% on all such purchases.

The best way to use cash back depends on individual preferences. For instance, if you’re running low on funds to pay your next credit card bill, you may consider using your cash back as a statement credit. Transferring your rewards into a bank account is also usually an option. On the other hand, if you’ve been meaning to do your bit toward furthering any particular cause, you may choose to donate your cash back to a charitable organization.

You may use your cash back to pay your credit card bill. This is because several cash back cards let you use the cash back you earn as a statement credit. If you’ve accumulated $100 worth of cash back and need to pay a $500 credit card bill, using your cash back would bring down the amount you currently owe to $400.

However, you might need to earn a minimum amount of cash back before you may use it as statement credit. For instance, you may use the cash back you earn as a statement credit only when your available reward dollars balance is $25 or more.

You may apply your cash back as statement credit only on the credit card from which you earned it in the first place. To pay the bill of another credit card, you’ll need to withdraw your cash back into a bank account first.

Yes, cash back credit cards actually reward you with money. Depending on the card you have, you may get a check from your card provider or transfer it to a bank account in your name. Some credit cards let you us cash back rewards to make purchases through popular online platforms such as Amazon and PayPal. Others allow you to book travel through the card provider’s own travel portal. Other alternatives to redeem your cash back might include getting vouchers and gift certificates or making charitable donations.

Some cards let you set up automatic redemption of your cash back to a designated bank account. However, this might require reaching specific thresholds. Unlike some rewards cards that limit your ability to redeem points to a particular rewards program, cash back cards are known to offer much more freedom around what you may do with your cash back.

Cash back credit cards can be worth it if used strategically. They are most beneficial for those who regularly use credit cards for everyday expenses. The trick is to pay off your balance completely each month so you don't rack up any interest that would cancel out the cash back rewards you've earned.

Ultimately, the worthiness of a cash back credit card varies from person to person. Assess your financial situation, spending behavior and the specific terms of the card to determine if it's a valuable addition to your wallet. When used wisely, cash back credit cards can provide a straightforward way to earn rewards on everyday purchases and save money over time.

When considering a cash back card, it may be helpful to learn the answers to commonly asked questions about how cash back credit cards work.