How Do Cash Back Credit Cards Work?
Updated January 5, 2024 at 5:16 pm
Terms apply to American Express benefits and offers. Enrollment may be required for select American Express benefits and offers. Visit americanexpress.com to learn more.
Cash back is a type of credit card reward — a built-in perk for using your credit card to make purchases. It’s expressed as a percentage, usually between one percent and five percent.
For example, a credit card might earn two percent cash back, which means for every $100 you spend, you earn $2 in cash back. It’s fairly straightforward compared to other types of credit card rewards, like points or miles.
Cash back cards aren’t all created equal. Some cash back cards only reward purchases made in certain spending categories (like groceries or dining) or with certain retailers, while others earn the same rate on all purchases. Plus, there are differences from card to card in how you can redeem your cash back.
These are all considerations to make when choosing the best cash back credit card for you.
How to Earn Cash Back
To earn cash back you’ll need to apply for a cash back credit card. There are some cash back debit cards that reward you for purchases made with your debit card. But there aren’t as many as there used to be, and they don’t offer the chance to earn high cash back rewards like some credit cards.
Next, you need to use the card to make purchases. Most credit cards don’t make you do anything special to earn at least 1 percent cash back on all purchases — just tap or insert your card, and know that you’re earning cash back.
The exception: Purchases within a few restricted categories typically don’t earn any cash back rewards:
- Lottery tickets
- Gambling
- Purchasing cryptocurrency
- Balance transfers
- Cash advances
Types of Cash Back Cards
Credit cards have different cash back programs that appeal to different types of spenders. Here’s a look at the four main types of cash back cards, based on how you earn.
Flat-Rate
A flat-rate cash back card is fairly straightforward to manage. It offers one cash back rate for all purchases — usually between 1.5 percent to two percent. So no matter where you spend your money, you can always expect to earn that rate. And unlike other types of cash back cards, it requires no optimization or strategizing. Just use the card and rack up cash back until you’re ready to redeem it.
A popular example is the Wells Fargo Active Cash® Credit Card, which earns unlimited two percent cash rewards on all purchases.
Bonus Category
Typically, cash back cards with bonus categories offer a tiered approach. You earn an elevated rate in specific categories, plus a base rate of one percent back on all other purchases.
Bonus categories are usually popular everyday categories, such as groceries, gas and streaming services.
A popular example of a bonus cash back credit card with tiered rewards is the Blue Cash Everyday® Card from American Express. It earns:
- 3% cash back at U.S. supermarkets on up to $6,000 per year in purchases, then 1% cash back.
- 3% cash back on U.S. online retail purchases, on up to $6,000 per year, then 1% cash back.
- 3% cash back at U.S. gas stations, on up to $6,000 per year, then 1% cash back.
- 1% cash back on other eligible purchases.
You’ll receive your cash back earnings in the form of Reward Dollars deposited into your Amex account. These Reward Dollars then can be redeemed as a statement credit or at Amazon.com checkout.
Rotating Bonus Category
Rotating category cash back credit cards also have bonus categories that earn a high cash back rate. The difference is that the bonus category changes, typically once per quarter.
Over those three months, you might earn five percent cash back in one or more categories. This setup can be a bit much for some people to keep track of, especially because many of these cards require you to enroll in or activate your bonus categories each quarter. Activating typically just means opting in within your mobile app. Others may find that the higher cash back rates in select categories are enticing enough to justify a little strategizing.
One drawback of rotating category cash back cards is that these cards typically have spending caps on the highest rewards rate. The five-percent category might be capped at $1,500 of spending per quarter. Once you hit that cap, you’ll only earn one percent cash back for the remainder of the quarter.
A popular example of rotating category cash back credit cards is the Discover it® Cash Back Credit Card. It offers five percent cash back on everyday purchases at different places you shop each quarter like grocery stores, restaurants, gas stations and more, up to $1,500 in quarterly purchases, then one percent. Plus, all purchases outside those bonus categories earn one percent cash back.
Bonus Category: Choose Your Own
There are also cash back credit cards that let you choose your eligible bonus categories.
One example is the Bank of America® Customized Cash Rewards Credit Card. You earn two percent cash back at grocery stores and wholesale clubs, plus 3 percent cash back in the category of your choice from the following options:
- Gas and EV charging stations
- Online shopping, including cable, internet, phone plans and streaming
- Dining
- Travel
- Drug stores and pharmacies
- Home improvement and furnishings
You can change your selection once per calendar month. But the three percent rate applies to the first $2,500 of combined spending within the selected bonus category and the grocery store and wholesale club category.
Another popular example is the Citi Custom Cash® Card, which automatically optimizes your spending patterns. It earns five percent cash back on purchases in your top eligible spend category each billing cycle, up to the first $500 spent (then one percent cash back thereafter). It also earns one percent cash back on all other purchases.
Eligible spending categories include:
- Restaurants
- Gas stations
- Grocery stores
- Select travel and transit
- Select streaming services
- Drugstores
- Home improvement stores
- Fitness clubs
- Live entertainment
Redeeming Cash Back
When you earn cash back, it doesn’t usually get deposited into your bank account right away. It typically collects within your credit card account until you redeem it. Common ways to redeem include:
- Statement credit: This will lower the amount of your credit card bill on the month you redeem. For example, if you redeem $50 in cash back as a statement credit, your credit card bill could go from $650 to $600.
- Online shopping: Some issuers allow you to pay with your cash back at checkout with select merchants.
- Direct deposit into your bank account.
- Gift cards
- Charity donations
Keep in mind that not all redemption methods give you the same value, and you’ll usually get the best value redeeming for a statement credit or direct deposit. Plus, some credit card issuers only let you redeem cash back in certain increments, like $25.
Frequently Asked Questions
How Do Credit Card Companies Categorize Purchases?
Credit card payment networks like Visa and Mastercard give all registered businesses a merchant category code. For example, drug stores have a specific code, while sporting goods stores have a different one. When you pay for purchases at a business, the credit card you use will identify this code and use that to attribute cash back to your payment.
What Are the Disadvantages of Cash Back Cards?
Spending caps and high APRs are two main disadvantages of cash back credit cards. Credit card debt is also an issue for many people. If you don’t pay your monthly balance on time and in full, you’ll have to deal with interest charges and maybe even fees. The interest charges continue to grow until you’ve paid your balance in full. This could lead to a cycle of debt, which is a heavy burden to get out from under.
Does Cash Back Expire?
It depends on the credit card issuer. Sometimes, credit card companies will close your account (and effectively take away your cash back) if your account becomes delinquent or dormant for too long.
Editorial Note: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, hotel, airline or other entity. This content has not been reviewed, approved or otherwise endorsed by any of the entities included within the post. We may earn a commission from partner links on Newsweek, but commissions do not affect our editors’ opinions or evaluations.
