What Is Cash Back and How Does it Work?

Cash back is a credit card rewards benefit that refunds the cardholder a small percentage of each purchase made with the card. Percentages may range anywhere from 1% to 3%. But they can go as high as 5% or even 6%, depending on the card issuer, card type, and what you’re buying.² For example, the Blue Cash Preferred^® Card from American Express offers 6% cash back for eligible purchases in multiple spending categories.

Every time you make an eligible purchase with your cash back credit card, your card issuer pays you back a percentage of that transaction. But just as you don’t have to pay your credit card bill immediately, your cash back reward won’t necessarily pay out immediately. Like your statement balance, your rewards can accrue each month and show up on your monthly statement.You can think of cash back rewards like getting a small rebate on every eligible purchase. 

Here’s an example. If your card offers 1.5% back for any purchase in any spending category, and you spend $1,000 in a month, you’ll get $15 in cash back rewards. Once it appears on your statement, you can redeem all of it, part of it, or let it build up.

Not all credit cards offer cash back. Some credit cards may offer rewards points or miles instead. Other cards, especially cards with no annual fee, may offer no rewards or cash back. When considering credit cards, you'll want to consider the card benefits, along with the interest rate, annual fee, and other fees, to help you find a card that fits your needs best.

There are three main types of cash back credit cards that allow you to earn cash back based on your spending.

1. Flat-Rate
   Some cards offer flat-rate cash back bonuses of about 1% on all eligible transactions.
2. Tiered
   Cards that offer a tiered structure allow you to earn higher percentages on certain purchases. That might look like potentially earning 3% cash back on gas purchases, 2% on groceries, and 1% on all other purchases.
3. Rotating Bonus
   These cards offer high rewards in rotating bonus categories. This means you could earn as much as 5% cash back in a particular spending category, but the category may change every few months.³

Certain rewards credit cards can even combine types of cash back. For example, the Blue Cash Everyday^® Card has tiered benefits that allow you to earn cash back on groceries at U.S. supermarkets, U.S. online retail purchases, and gas at U.S. gas stations. 

As you explore cash back credit cards, compare options to figure out which ones can reward you for the spending you’re already doing, whether that’s shopping online, buying the ingredients for a new recipe, or streaming your favorite shows and movies.

Most cards offer a number of ways to redeem the cash back rewards that accumulate on your card statement. Redemption options might include:⁴

• Statement credit. Use your cash back to help pay your credit card balance. You may be able to redeem your cash back rewards in the form of statement credits.
• Make a charitable donation. Some card issuers let you transfer your cash back bonus to a charity of your choice.
• Buy a gift card. Many cards offer a virtual shopping portal to purchase gift cards from select retailers, and some might even offer an extra financial incentive to do so.
• Apply cash back at online checkout. Some card issuers partner with retail sites to let you use your cash back bonus when making an online purchase.

It’s a good idea to check with your card provider to learn all the redemption opportunities available to you.

It’s important to note that some cash back cards come with restrictions that can be different depending on how you choose to redeem your cash back. You might be able to make a charitable donation for an amount as small as a penny, for example, but you might have to use at least $20 of your cash back to get a gift card. In addition, there can be a limit or cap on how much cash back you can earn on your purchases. In most cases, it’ll reset quarterly or yearly. 

It’s also worth noting that, depending on your card issuer and the card itself, some cash back rewards might expire. There’s no industry standard or law that determines if and when your bonus expires, so it’s best to check with your card issuer to make sure you understand the fine print. But keep in mind: you might lose your cash back if you close your account or go into default.⁵