How do cash back credit cards work?

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Credit cards don’t have to be scary. In fact, educated and savvy spenders use credit cards to their advantage, earning cash back or other rewards since most issuers nowadays offer some type of perk.

Can you really get cash back on a credit card? Yes, you can—with cash back credit cards.

Using a cash back credit card is a useful way to earn back extra cash in return for dealing with credit card payments. There are different reward categories to look at when deciding on a cash back credit card, but it’s important to understand how cash back works.

What is cash back and how do cash back credit cards work?

The way cash back credit cards work is simple—with every purchase you make with your cash back card, you earn back a percentage of cash rebate. The purchase percentage depends on what type of cash back credit card you have.

However, some transactions typically don’t qualify for cash back rewards, such as:

• Balance transfers
• Cash advances
• Money orders
• Lottery tickets and other gambling purchases
• Cryptocurrency
• Foreign currency exchanges

Credit card issuers can do this because merchants pay an interchange fee on every transaction. This interchange fee pays for the cash reward on cash back credit cards. Merchants are business owners who accept your payment and have to pay to process your credit card.

Another common credit card perk issuers offer is cash advances, which shouldn’t be confused with cash back. You receive money from both perks, but cash advances are essentially small loans against your credit limit. With cash back rewards, you receive a percentage of what you already spent as a rebate and do not need to pay it back.

Most credit card companies translate 100 reward points to $1. For example, if you purchased a plane ticket for $350 and used a cash back credit card with a 1.5 percent flat rate, you would earn back about $5 just for using the card.

Types of cash back credit cards

Several types of credit cards offer cash back advantages, and it’s important to understand how each of them works. Remember to keep in mind your current spending habits and financial status when navigating different card options.

Types of cash back credit cards
Flat-rate credit cards	Have the same cash back rate for all purchases
Tiered rewards credit cards	Have varying cash back rates for different purchase categories
Rotating category bonus credit cards	Have varying cash back rates for specific spending categories that change quarterly

Here are the most common types you will find:

Flat-rate credit cards: Flat-rate cards have the same percentage of cash—typically from one to 2.5 percent—applied to every purchase you make. With these cards, the amount of money something costs and where you bought it don’t matter.

This is the simplest card because you don’t need to enroll in other bonus categories or be involved in a tiered rewards system.

Tiered rewards credit cards: With tiered rewards cards, cardholders earn cash back at varying rates—from one to six percent—within specific spending categories. Spending categories may include:

• Groceries
• Travel
• Health
• Gas and electric vehicle charging
• Dining
• Bills
• Entertainment
• Shopping

This type of cash back card is more consistent than category bonus cards, but you still need to be able to spend the set amount to maximize the earnings.

This card is not recommended for those who use their credit card on more regular purchases rather than vacations and expensive purchases because tiered reward cards tend to provide lower percentage rates for those purchases.

Rotating category bonus credit cards: Category bonus cards are similar to tiered rewards cards in that they offer high cash back rates—sometimes two to five times higher—in specific spending categories like those listed above. However, these cards have alternating spending categories every quarter, giving you a higher percentage of cash back on purchases in specific categories.

These cards are great for those who know that they’ll be able to spend the set amount every quarter to earn the rewards. This card type works for individuals who are smart with their finances and have flexible spending habits.

Benefits of cash back credit cards

There are plenty of benefits to using a cash back credit card. The biggest benefit is that you earn money on almost every purchase you make using the card without extra hassle.

Low Introductory APR

Many issuers offer low or zero percent introductory purchase APRs on cash back credit cards. Introductory periods may vary from six months to two years. This is a great benefit to look for when applying for a cash back credit card, especially if you’re looking to make a large purchase soon. You’ll not only receive the cash back, but also have more time to pay off the purchase at a low or zero percent interest rate.

Signup bonuses and perks

In addition to receiving cash back on purchases, some credit card companies offer signup bonuses to new cardholders. This intro offer comes with specific requirements that vary by credit card—for example, the Wells Fargo Active Cash Card gifts $200 to new cardholders that spend $1,000 within their first three months.

The Discover it® Cash Back Credit Card offers cash back matching that matches your cash back rewards you earned within the first year—you could turn $500 into $1,000.

Works on most purchases

If you handle your finances well, using a cash back credit card on most of your larger purchases can be a great way to earn extra cash when spending. Typically, these cards work with purchases such as travel expenses, gas and expensive items.

Simple to use

This type of credit card is easy to use and understand. It’s unlike other credit cards that use miles or points systems for their rewards, which can easily become confusing for the user.

Requires a low amount of effort

Another perk of using a cash back credit card is that it requires little effort, other than making sure you pay your credit balance on time. Using a cash back credit card can also work as a savings account tool as you earn cash on your purchases. Any cash earned on a purchase made using the credit card comes back tax-free as well.

How to redeem cash back

The way you redeem your earned cash back depends on your card issuer and preference. A few of the most common ways to redeem cash back are through:

• Direct deposit or check
• Online shopping on specific sites
• Gift cards to select stores
• Putting it toward your statement balance

Amazon Rewards Visa Signature, for example, lets cardholders use cash back bonuses on Amazon purchases during checkout, or on Chase.com for cash, travel or gift cards.

To get cash back or statement credit, navigate to the rewards page on your issuer’s website or app. There, you can select which option you’d like, as well as add other accounts for depositing cash back bonuses. Keep in mind that some credit card companies hold minimum redemption amounts.

If you are more hands-on with your money, you can put the cash into cash envelopes to keep for later use.

Best credit cards for cash back

Discover it® Cash Back credit card

The Discover it® Cash Back card is best known for its cash back matching and quarterly categories. This rotating category credit card is best for smart spenders who stay on top of their finances because the additional quarterly bonus categories must be activated to earn cash back.

For smart spenders, it’s a good option as a primary credit card because cardholders earn five percent on everyday purchases at grocery stores, restaurants and on Amazon. All other purchases earn one percent back, outside of the quarterly bonus categories members opt into.

• Annual Fee: $0
• Rewards rate: One to five percent
• Intro offer: Cash back matching within the first year

Chase® Freedom Flex or Unlimited credit cards

Two of Chase’s most popular cash back credit cards are the Freedom Flex and Freedom Unlimited. The Freedom Unlimited is better for individuals looking for a low-maintenance card, and the Freedom Flex is best for those looking to maximize reward eligibility.

Both credit cards earn five percent back on travel booked on Chase’s rewards platform and three percent back at restaurants and drugstores. Other purchases earn 1.5 percent back for the Unlimited and one percent for the Flex card.

The difference between the two cards is the Freedom Flex is a rotating category cash back credit card, similar to the Discover it® credit card. You must activate the bonus categories to earn the rotating five percent cash back.

• Annual Fee: $0
• Rewards rate: one to 6.5 percent
• Intro offer: $200–$300 (new Freedom Unlimited cardholders earn an additional 1.5 percent cash back on all purchases within their first year)

Amazon Prime Rewards Visa Signature card

Prime members can apply for the Amazon Prime Rewards Visa Signature card. While cardholders earn the highest rates—five percent—shopping with Amazon and Whole Foods Market, you can also use this card elsewhere to earn rewards. Cardholders earn two percent back at restaurants, drugstores and gas stations, and one percent back on all other purchases.

• Annual Fee: $0
• Rewards rate: One to five percent
• Intro offer: Amazon gift card with no initial spending requirements

Capital One® Savor® and SavorOne® Cash Rewards credit cards

Capital One’s two most popular cash back credit cards—Savor® and SavorOne®—are also good for everyday use.

These cards have one of the highest cash back percentages at eight percent for purchases made on the Capital One Entertainment platform or Vivid Seats. Travel booked through Capital One Travel earns five percent back for both credit cards. The differences between Savor® and SavorOne® come down to their fees and cash back percentages.

The Savor® card has an annual fee and doesn’t offer an intro APR, but it comes with higher cash back percentages. This card is best for individuals who dine out often and spend more on entertainment, as these purchases earn four percent back.

The SavorOne® is better for those who eat out just as much as they dine in at home, as both dining and grocery store purchases earn three percent back. This card has no annual fees and zero percent APR for the first 15 months.

• Annual Fee: $0–$95
• Rewards rate: One to eight percent
• Intro offer: $200–$300

When to consider adding a new cash back card

Although a cash back credit card can be useful, you need to consider a few things before deciding to add a new credit card. First, you should have good to decent credit. If you start using a cash back card with good credit, you’ll see much better rewards than you’d see with poor credit.

You should only consider adding a credit card if you see yourself being able to pay your monthly credit balance. If you have reckless spending habits and struggle to stay on top of your payments, this might not be the right time to get a new credit card. Keep in mind if the credit card you’re considering comes with annual fees as well.

It also might be time to consider a new cash back credit card if you find your current card doesn’t offer a rewards program that works for your financial needs. If so, it’s important to know how to cancel a credit card correctly because it could negatively affect your credit score.

How does this all affect my credit score?

Using a cash back credit card can affect your credit score, depending on how you use it, just like any other type of credit card. If you tend to forget to pay your credit balance or aren’t on top of your finances, you’ll see a direct negative impact on your credit score.

However, if you’re organized with your finances and pay your credit balance regularly, you should see your credit score increase over time, which helps you in the long run.

When using a cash back credit card, it’s crucial to check your credit regularly to make sure you’re in good credit standing. The better your credit, the better your rewards will be when using the card.

It’s important to understand how credit card cash back works with your standing credit balance. If you’re interested in getting a cash back credit card, make sure your credit is in good standing, or learn how to fix your credit before getting a new card.

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Note: The information provided on CreditRepair.com does not, and is not intended to, act as legal, financial or credit advice; instead, it is for general informational purposes only.

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