If you’ve ever shopped for a credit card—or just seen a credit card advertisement—there’s a good chance you’ve heard about “cash back.” Not to be confused with asking to get cash back from the grocery store cashier after making a debit card purchase, cash back credit cards offer a benefit like rewards points—except you get money back, usually in the form of dollars that accumulate on your statement until you redeem them. Cash back credit cards let you earn a little extra money by spending money.
Cash back cards have become highly popular, possibly due to the simplicity and flexibility of cash rewards, according to the Consumer Financial Protection Bureau’s Consumer Credit Card Market Report for August 2019.1
But what exactly 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 typically range anywhere from 1-3%. 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, some cards offer flat-rate cash back bonuses of about 1% on all eligible transactions. Other cards offer a tiered structure, which could be 3% cash back on gas purchases, 2% on groceries, and 1% on all other purchases. Then there are cards that 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.
Every time you make an eligible purchase with your cash back credit card, your card issuer will pay 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 will 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.
Most cards offer a number of ways to redeem the cash back rewards that accumulate on your card statement. Redemption options might include:
- 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 will 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 to select retailers—and some might even offer an extra $5 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’s usually 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.
