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What is Cash Back on a Credit Card?
A cash back credit card is a type of rewards card that keeps things simple: You earn a percentage of the purchase price of qualifying items as a bonus that’s added to your account. So, for example, if you used a 2% unlimited cash back card to make a $200 purchase, your next statement would show $4 in rewards.
These cards can come with a wide range of options, so it's important to look for the best set of credit card features to meet your needs. In this article, we'll look at the benefits of cash back rewards cards, how they work, and how you can maximize your cash back bonuses.
How does cash back on a credit card work?
Cash back programs are not free money, because first you have to spend money. But if you're going to buy gas and groceries anyway, why not get a little bit of that back? The basic setup is that the credit card issuer returns to the cardholder a percentage of the amount spent in a given month, either overall or in a particular category.
Cash back credit cards offer a dizzying array of cash back percentages and categories. For example, some offer a flat rate for a wide range of purchases and others offer higher percentages for spending in bonus categories.
Card issuers typically limit cash back to a certain amount of purchases annually or per quarter. To get information on those limits, check the card issuer’s terms and conditions for your card.
Let's go deeper into the way that cash back works.
Accruing rewards when making purchases
The process of earning rewards begins when you use the cash back card for eligible transactions, which are determined by each card issuer. You won't see the rewards immediately, however. Typically, they accrue during a monthly billing cycle, and you'll see them in your statement.
Flat amount rewards rate
For a long time, 1% was the standard credit card cash back, then 1.5%. Each card issuer sets its own rewards rates.
Some cards offer one rate for everyday purchases, but a higher rate than others. For example, a computer manufacturer might offer a card with a flat 2% cash back, but the percentage rises to 3% on purchases of its own equipment.
One upside to these credit card rewards is that it's easy to keep track of the benefits.
Fixed-category rewards
Fixed-category rewards cards offer a cash back rate on spending in pre-defined categories like travel, groceries, gas, dining or entertainment. The percentage is usually lower on all other purchases.
Rewards rates may be higher with fixed-category cash back cards than with flat-rate rewards cards. The card issuer gets to define the categories and decide which merchants are included.
Rotating categories
If you're a hands-on person who likes to take advantage of credit card benefits, look for a card that offers bonus cash back on particular categories, which typically rotate each quarter. Planning to buy flooring or new kitchen cabinets? A card might offer 5% cash back for a few months each year at home improvement stores. On a $2,000 purchase, that gives you $100 back. Not bad!
Other popular categories are wholesale stores, restaurants, grocery stores, gas stations, and select retailers. But you have to pay attention to the calendar to reap the benefits of these credit card perks.
How do you receive cash back rewards?
You've done the homework, made the purchases, and now you're due some rewards. When you earn cash back rewards, they’re stored in your credit card account until you choose to redeem them. How will you collect it? There are two basic options: dollars and points.
Dollars
There are many ways to redeem cash back as dollars, with some of the most common being online shopping, gift cards for specific merchants, prepaid gift cards that can be used wherever credit cards are accepted, and statement credits.
Statement credits allow you to apply the cash to your credit card bill. In addition to paying down your debt, you may save additional money by avoiding interest charges. Certain cards also allow you to deposit your cash back into a checking or savings account or use it to make a charitable donation.
Points
Points rewards cards (sometimes called miles rewards) are a popular option with cardmembers who like to travel. You may see credit card offers for 2X, 3X or even 5X points on your purchases, which can then be redeemed for airline tickets, car rentals, and the like, or for merchandise such as gift cards and magazine subscriptions.
An offer of 5X points is not the same as 5% cash back, however. On a purchase of $1,000, 5% earns you $50, while 5X points gets you 5,000 points. That's not enough for an airline ticket right away, so you'd have to save them up.
Whether your card gives you cash back or points toward other purchases, watch for special offers each quarter that can boost your rewards.