Guide to Maximizing Cash Back Rewards

Cash back rewards can be a great way to put some money back in your pocket just for using your credit card. Many credit cards offer points on everyday purchases, such as groceries and gasoline, that can be redeemed in several ways. You could receive a statement credit, a check or gift card or in some cases, even apply the money toward your mortgage.

Many banks set a threshold to redeem cash back — typically at least $25 — that you can redeem each statement period. Rewards and the stipulations vary, like how many points, cash back or miles you’ll earn, so it pays to shop around to find the best rewards card for your spending habits and to maximize cash back rewards.

When you have cash back rewards on your credit card, you can receive a percentage of the amount you spend back as cash or another reward each statement period. Based on your card, you may receive cash back, reward points or airline miles for every purchase or only in certain categories, such as groceries, gym memberships or at gas stations or department stores. Percentages vary by category and by card, with many cards offering higher percentages for a certain time period as an incentive for new cardholders.

Cards with points or miles work similarly in that you earn a set number of points per purchase — usually one or more points or miles per dollar — that are then redeemed as a reward. Some cards give points when you make a purchase and also when you pay your bill. They may deposit a set number of points in your cash back account when you sign up for the card as an incentive. Cash back isn’t taxable, as it’s defined as a rebate by the IRS.

The benefit of using a cash back rewards card is that it’s an easy way to put money back in your pocket for making your usual purchases. Many cards offer higher percentages that can easily garner a little extra spending money each month. However, cash back rewards aren’t without their risks and drawbacks. You’ll need to watch out for making unnecessary or impulse buys just for the sake of receiving a cashback bonus.

Cash back cards have different parameters for offering rewards. Whether a flat-rate, tiered bonus or rotating category, determining how certain cash back credit cards work or which is right for you will depend on your individual spending habits.

Flat-rate cash back credit cards offer the same percentage back on purchases regardless of the purchase category. Rather than a tiered or rotating system that provides a higher percentage of cash back in certain purchase categories, cardholders with a flat-rate cash back card receive a flat percentage on all purchases made on the card regardless of type.

These cards offer greater cash back in specific categories. For example, you might receive 6% on groceries and at gas stations, 3% on dining and at department stores and 1% everywhere else. Often a higher introductory percentage may be offered which then drops after a certain amount of time, usually after the first year.

Rotating category cash back cards offer cash back rewards in different categories each quarter or billing cycle. These cards usually offer cash back year-round in other categories and the rotating categories are bonus cash back incentives. Some cards offer predetermined bonus categories while others use the categories where you spent the most.

There are several different ways to redeem your cash back rewards. Many credit card issuers allow you to redeem for a statement credit, gift card, a check in the mail or flight vouchers. Some even offer hotel vouchers and concert or event tickets. You’ll need to be aware of redemption minimums as well as the type of card you have before choosing a way to redeem.

This is one of the most straightforward ways to redeem cash back. Typically, you’ll redeem by logging into your card’s online account or mobile app and navigating to the rewards section. A statement credit will appear on your balance within a certain amount of days that varies by cardholder.

This method is a great way to save some money on your bill each month. A drawback is that you aren’t receiving any cash in hand; it’s simply reducing your total bill. So if your outstanding balance is $700 and you have $50 in cash back rewards, for example, you could redeem for a statement credit. This would decrease your bill to $650.

Cards that accrue miles can be cashed in for airline credits. You can call your card issuer or sign into your online account or through its mobile app. For example, your bill over three months was $20,000. You would accumulate 20,000 miles, or $200 in most cases if the rate was a dollar per mile earned, which could be used to purchase a $200 flight.

Frequent fliers benefit from mileage credit cards. However, if circumstances prevent you from traveling — such as natural disasters or other restrictions — cashing in your rewards in this way could be a waste.

Similar to cashing in for a statement credit or travel miles, you would typically log into your online account or mobile app to redeem your rewards for gift cards. Many cardholders have apps just for rewards programs where you can browse through the available retailers.

If you’d like to give people cash gifts and don’t need the extra cash to spend in another way, redeeming it for gift cards can be beneficial. However, you should make sure you’re getting a good exchange rate when you go to redeem. Many may not be the best deal when compared to redeeming for a statement credit.

You can request a check from many card issuers. Some will directly deposit funds into your account. Typically, you’ll contact your issuer or sign into your online account to have a check sent to your mailing address or funds deposited into your bank account. This method puts cash in your hand, but expect to wait up to 14 days or more for your check to arrive. There is also usually a redemption minimum of around $25 and you should deposit or cash your check promptly to avoid expiration.

The best way to use your cash back rewards depends on your spending and overall financial situation. Whether you’re working toward paying off debt, want to invest your money or would like some extra cash to spend, cash back rewards are an easy, tax-free way to pad your pockets. Consider starting a safety net or saving toward a specific goal with the extra cash you earn through cash back rewards.

Growing your safety fund or nest egg is a smart way to use your rewards. This can help you save money that was acquired tax-free and increase your savings account each month or quarter. Just be careful that you don’t overspend in order to bolster your rewards, having the opposite effect.

By regularly redeeming your cash back rewards and depositing into an interest-bearing account, you earn compound interest. This can help you in your quest to save for retirement or build up your safety fund. Since cash back rewards do not earn interest when they are in your credit card account, it is wise to cash them out regularly so you can earn interest.

If you’re looking for an easy way to start investing, using your cash back earnings can be a relatively low-risk way to start. Since the money is tax-free and a bonus rebate, it may help those who are hesitant about investing take the plunge. But unless you’re getting large sums or using additional funds to invest, you probably won’t be able to make significant stock purchases at least at first.

Say you receive $50 in cash back rewards each month. You could start using an app such as Stash or Acorns where you can make small purchases to build your investing portfolio. This way, it’s a low-commitment way to begin learning about investing and another way to save money. You could even set up recurring investments to make it easier.

If you have debt, you could put your cash back rewards toward payments. Using the first strategy of depositing rewards into an interest-bearing account can help you maximize the amount that you can put toward repaying debts. But if you’d like to make payments immediately, it can be helpful to use cash back rewards toward this purpose.

For example, if you have student loans, you could contribute toward your loans using your cash back funds. While you are not able to pay student loans directly with a credit card, you can request a check or direct deposit so you can apply funds toward this purpose. Unless you are receiving large sums in cash back rewards, you probably won’t be able to make a full payment using rewards alone, but every dollar can help pay down your balance.

Just like for personal use, using cash back rewards can put money back in your business. Many cash back cards offer perks that businesses can use, such as miles for flights, hotel vouchers or cash back to be used for other business expenses. And purchasing office expenses and supplies with your card can help you earn more rewards in incentivized categories.

Small business credit cards offer cash back in select categories and other bonus offers. They offer perks for businesses, but watch out for high annual fees. They also require a good to excellent credit score.

Many cards offer a tiered system of points broken down by category. Some cards also offer additional cash back if you also have a business checking account with the bank. You’ll want to check over your expenses carefully to see where you’re spending the most and how to maximize your earnings.

Travel credit cards accrue points or miles that can earn you free flights or hotel stays. Some are airline or hotel-specific, while others can be transferred, offering more flexibility. You’ll want to read the fine print to know about any foreign transaction fees and high annual fees. There also can be blackout dates during which you cannot use your rewards, so plan carefully.

Depending on the needs of your business, a transferable card offering more flexibility or an airline-specific card could be right for you. Think about your business’ travel plans: Are you loyal to one airline? Do you always stay at the same hotel chain? Signing up for the provider’s specific cards could be the best option.

If your business requires global travel, a transferable card may be better. You should also look at extra features like airport lounge access and hotel upgrades and other perks.

Many cards offer extra miles or perks when you shop at certain retailers. The United MileagePlus X card, for example, lets you earn bonus miles on e-gift card purchases made through the MileagePlus app. So if you are planning to spend on office supplies or business lunches at select restaurants, for instance, using this card to purchase gift cards through the app can help you earn more miles. It’s helpful to read the fine print to be sure you’re not missing out on any opportunity to earn more miles.

United Chase cardholders earn an extra 25% on miles earned on e-gift certificates. So if you are a cardholder, the way to take advantage of this using business expenses is to purchase gift cards for the items or services you plan to buy. Learn more about its rules and regulations.

Maximizing your cash back credit card rewards is only one part of making smart financial decisions. Learn more about relevant credit card topics, such as

• Best Travel Business Credit Cards: Learn how to maximize your business credit card for travel rewards.
• Cash Back Advice: Find out what MoneyGeek experts have to say about cash back credit cards, how to find the best one for you, steps for applying, and more.
• Credit Scores 101: A good credit score is often a key deciding factor in lending and credit cards.
• Travel Hacking: Learn how to maximize travel rewards and credit cards to cut costs on travel and vacations.