Cash back credit cards offer a simple and rewarding way to pay for your everyday purchases. By using a cash back credit card, you can earn a percentage of your purchases back in the form of cash, which can then be redeemed in a variety of ways. In this guide, we’ll take a comprehensive look at how cash back credit cards work, the different types of cash back cards available, the benefits and downsides of using a cash back card, and what to consider before applying for one. Whether you’re a seasoned credit card user or new to the world of rewards, this guide will help you understand everything you need to know about cash back credit cards.
What is a cash back credit card?
A cash back credit card is a type of credit card that rewards cardholders with a percentage of their purchases back in the form of cash. This cash back can usually be redeemed in the form of a statement credit, check, or deposit into a bank account.
How does cash back work?
When you use a cash back credit card to make a purchase, you’ll earn a certain percentage of that purchase amount back in the form of cash back. For example, if you have a card that offers 1% cash back on all purchases and you spend $100 at a store, you’ll earn $1 in cash back.
The exact percentage of cash back you’ll earn on your purchases will depend on the specific cash back credit card you have. Some cards offer a flat rate of cash back on all purchases, while others offer different rates depending on the category of the purchase. For example, the Capital One Savor card offers 4% cash back on dining, 3% at grocery stores and 1% cash back on all other purchases.
Once you’ve earned cash back, you’ll typically have several options for redeeming it. Most cash back credit cards allow you to redeem your rewards as a statement credit, check, or bank account deposit. Some cards also offer the option to redeem your rewards for gift cards or travel. Be sure to check with your credit card issuer to understand the available redemption options.
Types of cash back cards
There are several different types of cash back credit cards, each with its own unique rewards structure.
Flat-rate cash back cards
Flat-rate cash back cards offer a fixed percentage of cash back on all purchases, regardless of the category. Capital One Quicksilver is a flat rate card offering unlimited 1.5% cash back on every purchase.
Tiered-category cash back cards
Tiered-category cash back cards offer different percentages of cash back on purchases in different categories. For example, Blue Cash Preferred® Card from American Express earns 6% cash back at U.S. supermarkets and 3% at U.S. gas stations and on transit.
Bonus category cash back cards
Bonus category cash back cards offer a higher percentage of cash back on purchases in certain categories, but a lower percentage on all other purchases. For example, a card might offer 5% cash back on gas and 1% cash back on all other purchases.
Rotating category cash back cards
Rotating category cash back cards offer a higher percentage of cash back on purchases in certain categories, but these categories change on a regular basis. For example, a card might offer 5% cash back on groceries for one quarter and then 5% cash back on gas for the next quarter. The Chase Freedom Flex℠ and Discover it® Cash Back are popular rotating category cards.
Choose-your-own-category cash back cards
Some cash back credit cards allow cardholders to select their own categories for earning higher cash back rewards. For example, a card might allow you to choose one category in which you’ll earn 5% cash back and all other purchases will earn 1% cash back. The Citi Custom Cash℠ Card is an excellent example of this type of card where they offer 5% cash back on up to $500 spent in your highest spend category per billing cycle (eligible options include grocery stores, home improvement stores, fitness clubs and more). 1% back on all other purchases.
Benefits of cash back credit cards
There are several benefits to using a cash back credit card:
- Earn rewards on everyday purchases: With a cash back credit card, you can earn rewards on purchases you were already going to make, such as groceries, gas, and bills.
- Easy to understand rewards structure: Cash back rewards are easy to understand and don’t require you to track complex points systems or expiration dates.
- Redeem rewards in a variety of ways: Most cash back credit cards allow you to redeem your rewards in a variety of ways, including statement credits, checks, or bank account deposits.
- Potential to save money: By earning cash back on your purchases, you can potentially save money on things you were already going to buy.
Downsides to cash back credit cards
There are also some downsides to using a cash back credit card:
- Higher-than-usual APR: Some cash back credit cards have higher annual percentage rates (APRs) than other types of credit cards. This means you’ll pay more in interest if you carry a balance on your card.
- Wait times to access your cash-back funds: Depending on the credit card issuer and the specific terms of your card, it may take some time for your cash back rewards to become available. For example, you may have to wait until the end of the billing cycle or until you reach a certain threshold before you can redeem your rewards.
- Earning cap: Some cash back credit cards have caps on the amount of cash back you can earn in a certain period of time (monthly, quarterly and yearly).
Ways to redeem cash back
There are several ways to redeem your cash back rewards:
- Statement credit: You can choose to apply your cash back rewards as a credit on your credit card statement. This can be helpful if you have a balance on your card and want to pay it down faster.
- Check: Some credit card issuers will allow you to request a check for your cash back rewards. This can be a good option if you don’t have a balance on your card and want to use the cash for something specific.
- Bank account deposit: Some credit card issuers will allow you to deposit your cash back rewards directly into your bank account. This can be a convenient option if you want to use the cash for everyday expenses.
- Gift cards: Some credit card issuers offer the option to redeem your cash back rewards for gift cards to popular retailers.
Before applying for a cash back credit card
Before applying for a cash back credit card, it’s important to consider the following:
- Your credit score: Cash back credit cards typically require good to excellent credit for approval. If your credit score is on the lower side, you may not qualify for the best cash back cards.
- Your spending habits: Different cash back credit cards are best suited for different spending habits. If you spend a lot on groceries, you might look for a card that offers a higher cash back rate on groceries.
- Annual fees: Some cash back credit cards charge annual fees, which can eat into your rewards if you don’t spend enough to offset the fee. Be sure to consider whether the annual fee is worth it based on your spending habits.
- Rewards caps: Some cash back credit cards have caps on the amount of cash back you can earn in a certain period of time. Be sure to check for any rewards caps before applying for a card.
- Interest rates: If you carry a balance on your credit card, the interest rate will be an important factor to consider. Look for a card with a low interest rate to minimize the cost of borrowing.
- Sign-up bonuses: Many cash back credit cards offer a sign-up bonus for new cardholders who meet a certain spending threshold within a certain time frame. For example, a card might offer a $100 bonus for spending $500 within the first three months. Be sure to consider any sign-up bonuses when comparing cash back credit cards.
- Redemption options: Some credit card issuers have more flexible redemption options than others. For example, some may allow you to redeem your rewards for travel, while others may have more restrictions. Consider what redemption options are important to you when choosing a cash back credit card.
- Foreign transaction fees: If you travel internationally or make purchases in foreign currency, you’ll want to look for a cash back credit card that doesn’t charge foreign transaction fees. These fees can add up quickly and significantly reduce the value of your rewards.
- Additional perks: Some cash back credit cards offer additional perks, such as extended warranties, purchase protection, and price protection. Be sure to consider any additional perks when comparing cash back credit cards.