How Does Credit Card Cash Back Work?

Introduction

Having a credit card is convenient. Having a credit card with rewards is convenient and gives you a little something back every time you use it.

Cash back rewards cards seem simple enough, but there’s more to them than meets the eye.

What Are Credit Card Cash Back Rewards?

Most cash back rewards credit cards work the same way: You make purchases with the card and earn rewards which have a cash value.

Cash back rewards are especially straightforward compared to other popular rewards options: points and miles.

Often, points are redeemed or transferred to a hotel or airline loyalty program, which have their own rules and requirements. That caveat also applies to miles, without the transfer or redemption step in between.

Points can sometimes be redeemed for statement credit or merchandise, but point values vary between cards and can change at any time.

But with cash back rewards, you can clearly see how much you’ve earned at any given time.

How Do Cash Back Credit Cards Work?

Let’s say a card earns 1% cash back rewards on all purchases. If you spend $100 on that card, you’ll earn $1 in rewards at the end of the billing period.

This example assumes a flat-rate rewards structure, which is pretty common. But understanding other structures helps you figure out which type of rewards card is best for you.

Types of Cash Back Credit Cards

If you’re looking into cash back rewards cards for the first time, you might be surprised at how much variety there is. Most cash back rewards cards fall into one of these rewards structures:                                                         

Flat-rate cash back cards

The simplest of the bunch, flat-rate cards return a percentage of all your eligible purchases as cash back rewards. These cards often offer around 1 to 2% back.

Category-specific cash back cards

Category-specific cards offer rewards for specific spending categories. For example, one of these could offer rewards only on gas and grocery purchases, specifically.

Tiered cash back cards

You can think of these as a type of category-specific cards. They offer different levels of bonus rewards for different spending categories.

One of these cards may offer:

• 3% cash back at grocery stores

• 2% at gas stations

• 1% on everything else

Custom category cash back cards

These effectively work the same as category-specific cards, except you decide what earns a higher rewards rate.

These cards sometimes allow you to select from a list of eligible categories, so you can customize it to your spending.

A card like this might offer:

• 3% on your first chosen category

• 2% on your second chosen category

• 1% on everything else

Other cards like this automatically assign categories based on your spending habits, rather than making you choose.

Rotating category cash back cards

With these cards, the rewards categories change regularly — typically every quarter. But they offer even higher rates of bonus cash back rewards in those categories.

A card with this rewards structure could look like this:

• 5% on flights and hotels in the summer

• 5% at restaurants and gas stations in the fall

• 5% at supermarkets and online stores in the winter

• 5% at home improvement stores and gyms in the spring

• 1% on all other purchases, all the time

How To Maximize Cash Back Rewards

One cash back rewards card earns more rewards than having no card, and that could be totally fine for you. But if you want to maximize your credit card rewards, you can take a few steps to get there.

Choose the best card based on spending habits

Go over some of your credit card statements. See where you really spend your money, so you can find the cards that align with those categories.

Time purchases to align with bonus categories

With rotating category cards, you’ll usually find a rewards calendar on the issuer’s website or app. If you know you have a big purchase coming up, like a home renovation or a vacation, you can make those purchases when it would net you the highest rewards.

Combine multiple cash back rewards cards for better benefits

If you’re willing to manage a few different cash back rewards cards, you can have the best of all worlds.

Someone who cooks at home, has a long commute and loves movies would be well-served by tiered cards that reward groceries, gas and streaming.

They could then add a rotating category card to their wallet and earn a bit more based on their quarterly calendar, and then a flat-rate card for all other purchases.

Use shopping portals and bonus multipliers

Finally, many credit card issuers also offer a shopping portal on their app or site. These work differently depending on the card, but they generally offer additional rewards when you spend with specific partners, whether in person, online or both.

How Cash Back Rewards Are Redeemed

Once you’ve earned some — and depending on your card — you have a few options for redeeming your rewards.

One common — and convenient — option is to do nothing at all, because many issuers automatically redeem your cash back rewards as a statement credit.

Others allow you to do that manually, or to transfer the rewards to your bank account.

Some programs even let you purchase gift cards, travel or merchandise with your cash back rewards, directly through their app or website.

At the end of the day, these options all boil down to receiving the cash value of your rewards in one form or another.

Now, points and miles-based rewards cards can potentially offer more value, since those don’t always have a specified cash value. But that goes both ways.

There are situations where the same number of miles can book a very expensive flight to Destination A or a relatively inexpensive flight to Destination B. If you only want to go to Destination B, your miles just aren’t as valuable.

But with cash back rewards, it’s just a straightforward dollar value.

Pros and Cons of Cash Back Rewards Credit Cards

As with most financial products, there are a few factors to weigh when considering a credit card with cash back rewards.

Pros of cash back rewards cards

One of the clear benefits of using a cash back rewards card is the extra rebate on everyday spending. Just by using one, you’re effectively paying a little bit less on things.

There’s also the flexibility in redemption options — you simply get the cash value of your rewards. You aren’t locked into flights or hotels, like many points-based or airmiles cards.

And finally, the rewards are easy to understand. You don’t have to optimize travel plans or transfer to another program. You spend, then get a percentage of that back.

Cons of cash back rewards cards

The first thing to consider is whether you carry a balance. If you carry a balance, you’ll be charged interest on that balance — and high APRs will absolutely outweigh your rewards.

Cards can also have annual spending caps, or category restrictions, which can limit your earning potential. For example, a card may offer 5% cash back rewards on groceries, but only for the first $5,000 of spending in the year. After that, it may be worth using another card.

Finally, many rewards cards come with an annual fee. It’s up to you to determine if the rewards, plus any other benefits offered by the card, are worth the card’s annual fee.

What to Know Before Applying for a Cash Back Rewards Card

There are a few things you should know before applying for any credit card, including a cash back rewards card: what your credit score is, what your credit history looks like, and what associated fees or restrictions come with the card.

But for cash back rewards cards specifically, knowing your own spending habits and understanding a card’s bonus spending requirements are essential for picking a card in the first place.

FAQs About Cash Back Rewards Credit Cards

Do cash back rewards expire?

With most cards, cash back rewards do not expire as long as you keep your account open and in good standing. It’s best to check your specific card’s terms, however.

Can I have multiple cash back rewards credit cards?

If you meet each card’s requirements, you can have multiple cash back rewards cards. Just remember that applying for too many credit lines around the same time may affect your credit score.

What happens if I return a purchase I earned cash back rewards on?

In most cases, if you return a purchase after you earned cash back rewards from it, those rewards will simply be deducted from your rewards balance.

Bottom Line

Credit cards with cash back rewards can be powerful financial tools, if you avoid fees and the interest incurred carrying a balance. You can have a flat cash back rewards card and do pretty well for yourself. Or you can find a specific card, or combination of cards, and maximize your rewards potential. It’s all up to you.

If you’re looking for a new credit card that offers cash back rewards on several spending categories, see if you pre-qualify for the Credit One Bank Platinum X5 Visa Signature.