In an era of rising expenses, a cash back credit card can be a wise choice to allow you some extra cash when making your everyday purchases. But what is a cash back credit card, and how does it work? We’ll help you find out so you can make the most of the cards and your money habits.
How Cash Back Credit Cards Work
Cash back credit cards are designed to reward you for your spending by giving you back a percentage of everything you spend in the form of cash rewards. These rewards can add up pretty quickly to make for a nice little bonus, but how this works can depend on exactly what type of credit card you have.
Earning Cash Back on Purchases
Since you earn a percentage back on every dollar you spend with your cash back credit card, the simple way to understand how much cash back you will receive is to do the math as follows. If your card offers 2% cash back on groceries and you spend $100, your rewards would be $2. Note that the percentage depends on the category of purchase; many cards offer higher rewards for purchases made in certain categories like groceries, travel or dining.
For instance, the Chase Freedom Flex® has 5% cash back on rotating categories every quarter (like grocery stores or gas stations), while the Capital One Quicksilver offers a flat 1.5% cash back.
How and When Rewards Are Credited
Once you purchase something, your cash back reward won’t appear immediately—it usually shows up in your account once your purchase has actually been fully processed. Some cards will only credit the rewards after you pay off your balance while other cards will credit the rewards in as little as two days.
You can let your rewards pool in your account until the trigger to redeem strikes you. Depending on the card, you can get your cash back as a statement credit (which lowers the amount you owe on a card) or as gift cards and more, depending on the card’s redemption options.
Types of Cash Back Credit Cards
Not all cash back credit cards are alike. Depending on how you spend and which rewards you hope to maximize, there are a few different types you can choose from.
Flat-rate cash back cards
Flat-rate cash back cards provide the same percentage back no matter what you buy. With this type of card, say hello to simplicity. For example, the Wells Fargo Active Cash® Card has no revolving categories; you earn 2% cash back on every purchase. This isn’t the best option if you’re looking to maximize rewards on specific purchases.
Advantages of Flat-Rate Cards:
- Simplicity: No need to track spending categories.
- Consistency: You always earn the same percentage on all your purchases.
Disadvantages of Flat-Rate Cards:
- Limited Rewards Potential: You could be missing out on higher rewards for purchases in categories where you spend a lot.
Tiered Cash Back Cards
Tiered cash back cards provide a greater percentage of cash back in some spending categories, like dining, gas, or groceries. The Blue Cash Preferred® Card from American Express, for example, earns 3% at U.S. supermarkets (on up to $6,000 per year in purchases, then 1%), 2% at U.S. gas stations and 1% on other purchases.
These cards reward you according to your spending habits, and if you shop frequently in the places where you earn the most, you can rake in rewards hand over fist.
Pros of Tiered Cards:
- Bonus Rewards for Certain Categories: Get extra rewards for specific purchases.
- Strategic earnings: You can design your spending around high-reward categories.
Cons of tiered cards:
- Spending caps: Once you hit your cap in a category, cash back declines.
- Complexity: It can be tricky to remember which categories offer the best rewards.
Rotating Category Cash Back Cards
Rotating category cash back cards give you a higher percentage of money back on different categories that rotate each quarter (or every three months). For example, Discover it® Cash Back offers you 5% on groceries, online shopping, or gas stations, but you have to activate those categories each quarter to earn the bonus.
These cards can be lucrative, but it requires some effort to stay on top of the categories and remember to activate them each quarter.
Pros of Rotating Cards:
- Big Rewards Potential: Get up to 5% cash back on rotating categories.
- Variety: Categories change with shopping habits throughout the year.
Cons of Rotating Cards:
- Requires Attention: You need to actively track the rotating category and remember to activate it.
- Unpredictable: You’re tied to the categories chosen by the card issuer.
Cash Back Credit Card Pros and Cons
Cash back credit cards have plenty of pluses, and a few cons. Here’s the breakdown.
Pros:
- Simple: No complicated points or miles systems—just us cash.
- Versatile: Redeem cash back as statement credits or towards gift cards, or use it to buy things outright.
- Unlimited: Some cards allow you to earn cash back on almost every type of purchase.
Con:
- High APR on Loans of Cash: Although you get rewarded for purchases charged to your card and even earn cash by taking loans of cash against your card balance, cash loans can come with high interest rates, so you need to be wise with credit.
- Fees: Annual fees, foreign transactions, etc.
- Low rewards for those who may not use the card in areas of highest rewards.
Where to Cash In to Maximize Your Cash Back Rewards
To make the most of your cash back rewards, follow these practical tips.
Choosing the Right Card for Your Spending Habits
The first step to maximizing your cash back rewards is to pick the right card for your spending. If you spend a lot in certain categories—say, groceries or gas—look for a card that offers enhanced rewards in those categories, like the Blue Cash Preferred® Card. If you’re looking for something simple, consider a flat-rate cash back card, like the Capital One Quicksilver.
Combine With Cash Back Apps and Websites
You can also combine those programs with apps such as Rakuten or Ibotta. These will earn you even more rewards for that purchase, especially online—and when paying with your cash back credit card, you double up on rewards for the same purchase.
Common Misconceptions Surrounding Cash Back Credit Cards
Let’s shed some light on cash back credit card misconceptions. Here are a couple that we regularly come across.
Myth 1: Cash back rewards are instantly available
As desirable as that may be, cash back isn’t always instantly available. Transactions must first be processed, and in most cases the promise of a reward isn’t paid out until you’ve paid your next bill.
Misconception #2: You Can Take a Cash Loan From Your Cash Back
While cash back credit cards are a perfect way to earn small bonuses, they’re not designed for cash loans. A cash loan through your card can carry high fees and interest rates. Always try your best to find a different source for a loan.
Misconception #3: All Cash Back Cards Are the Same
In reality, there are many cash back cards, covering a range of different needs. It’s not a flat rate everywhere, for starters. Or, more often than not, it’s not excluding every tierri in between narrows to rotating categories.
Conclusion
If you want to earn rewards for your everyday spending, a cash back credit card is a great option. Whether you prefer a card that offers a flat rate of cash back or something to match your insatiable need for more reward by tiered or rotating category cash back cards, there’s an option for everyone. Getting started is as easy as picking your card and properly understanding how to earn and redeem rewards.
The best cash back credit card for you will depend on your spending habits. Pick a card that fits your needs, and remember to redeem the rewards that you earn.
Now that you know how cash back credit cards work, research which one is best for you, and start cashing in on their perks! Avoid cash loans on your credit card, but make the most out of your purchases, and watch your spending earn you money!
FAQ
How do cash back credit cards work?
You earn cash back on eligible purchases that you make with the card. The cash back is typically a percentage of the amount you spent and is credited to your account after the purchase is made.
When do I get my cash back?
It depends on your card issuer and when your purchase posts. Some issuers reward you right after you make a purchase, while others do so several days or weeks later or once you pay off the purchase.
What are tiered cash back cards?
Tiered cash back cards earn different percentages of cash back depending on the category of the purchase. For example, you might earn 3% on groceries, 2% on gas, and 1% on everything else.