Cash back is an incentive credit card issuers typically offer that refunds a small percentage of a cardholder’s purchases. You can apply your cash-back rewards to your credit card bill or redeem them as a check, bank deposit, for merchandise, or for store gift cards. Cash-back rewards usually range between 1% and 6%.
Most credit card issuers offer some type of rewards, either cash back or points. A cash-back credit card lets you earn cash rewards on each purchase. You can redeem your cash back as a mailed check or bank deposit, or you can use it to cover a portion of your credit card balance.
How Does Cash Back Work?
Cash-back rates and terms vary from one card issuer to another. Credit card issuers typically define the transactions that are eligible for cash-back rewards. Every time you use your cash-back credit card on an eligible purchase, you earn a percentage of your purchase back at the end of your billing cycle.
For example, let’s say your cash-back credit card pays 1% of your eligible purchases in cash rewards; if you spend a total of $1,000 on eligible purchases at the end of your billing cycle, you’ll earn $10 cash back for that billing cycle. Some credit cards offer unlimited cash-back rewards, while others provide a limit or cap on how much cash back you can earn in specific spending categories.
Who a Cash-back Credit Card Is Right For
Cash-back credit cards are ideal for most credit card users who want to enjoy a small refund from their purchases. However, while the incentives of a cash-back credit card are enticing, there are certain credit card users who will gain the most benefits from a cash-back credit card.
Cash-back credit cards are best for:
- Frequent credit card users: If you’re a frequent credit card user, you should opt for cash-back credit cards to earn rebates on your purchases. Make sure to find out which purchases are eligible for cash back so you can choose a credit card that aligns with your spending habits.
- People who don’t travel often: People who don’t travel often will benefit most from cash-back rewards vs points rewards because they can redeem their rewards as statement credits, direct deposits, or as gift cards. On the other hand, people who travel often should opt for points-based credit cards.
- Small business owners: Small business owners can use a small business credit card that pays cash-back rewards to save on business-related purchases. These cards offer rewards up to 5% of your purchase price.
Cash-back credit cards are reserved for people who want to redeem their rewards as a statement credit or direct deposit. If you want to save big on travel expenses, consider a card that offers points-based rewards.
Ways to Redeem Cash Back
The best thing about cash back is that you can redeem your rewards as cash. However, if you don’t want to get cash, there are also other ways to redeem your rewards. Methods of redemption may vary from one credit card company to another.
You can redeem cash back as:
- Statement credits: A statement credit lets you use your cash back to help pay down your credit card bill. This is one of the easiest cash-back redemption methods because you just simply use your cash rewards to cover a portion of your credit card bill.
- Checks or direct deposits: If you choose to redeem your cash rewards through a paper check, your card issuer will mail you a check. You can also choose to have the cash directly deposited to your savings or checking account.
- Gift cards or merchandise: You can also redeem your cash back in the form of gift cards or gift certificates for popular stores. Also, some credit card companies let you choose an item or merchandise with value equivalent to your cash rewards.
Most cash-back credit cards offer different ways to cash out your rewards. Depending on the terms of the card issuer, you may need to earn a certain amount of cash rewards before you can make a redemption.
Types of Cash-back Credit Cards
There are different types of cash-back credit cards, and each earn cash rewards differently. The four common types of cash-back credit cards are category bonus, fixed-rate, and cash back for business.
1. Category Bonus Cash-back Credit Cards
Category bonus cash-back cards offer higher cash-back rates (ranging from 2% to 6%) on specific bonus categories, like restaurants, gas stations, airfare, and online purchases. Some category bonus cash-back cards require you to register for the bonus categories every quarter. You’ll also likely encounter limits on how much spending will earn you the maximum bonus rate.
Other purchases may still be eligible for a lower cash-back rate (typically 1%). Category bonus cards can help you earn more cash rewards, but you need to monitor which spending categories earn the highest rewards rate to maximize your benefits.
2. Fixed-rate Cash-back Credit Cards
A fixed-rate cash-back credit card is the simplest rewards program to understand because it lets you earn a fixed percentage of cash back for every purchase. With a fixed-rate cash-back credit card, you don’t need to monitor which store to use your credit card because you earn the same cash-back rate for every purchase you charge on your card. Most fixed-rate cash-back cards offer 1% to 2% back every time you swipe your card.
3. Cash-back Business Credit Cards
Business owners can also apply for business credit cards that offer cash back. Using a cash-back credit card for business allows entrepreneurs and business owners to get a refund for their business-related purchases, letting them save on their expenses. The best cash-back business credit cards offer up to 5% cash back.
Popular Cash-back Credit Cards to Apply For
Big credit card companies such as Chase Bank, Bank of America, and Discover offer cash-back rewards credit cards. Each card has a different set of rules, cash-back rates, introductory promotions, and ongoing rewards.
Credit Card | Ongoing Rewards | Introductory Rewards |
|---|---|---|
| $200 cash back after you spend $500 on purchases in your first three months from account opening | |
| $200 cash rewards bonus after making at least $1,000 in purchases in the first 90 days of your account opening | |
| Discover automatically matches all the cash back you've earned at the end of your first year; there's no signing up needed and no limit to how much it will match |
Bottom Line
Cash-back credit cards are a good option for credit card users who want to earn cash rewards from their purchases. Your monthly spending habits, including your typical spending categories, will likely help you determine which card would benefit you most. Consider other fees involved, such as the annual fees and annual percentage rates (APRs), and make sure you don’t pay more in fees than what you can possibly earn.
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