Earning money while you spend it sounds too good to be true. But that’s exactly what cash back programs do — sort of.
Cash back rewards provide a percentage of the money you spend back as a refund, depending on the card, issuer, and purchases. It’s an exciting way to manage your finances and optimize every buy. But there are drawbacks, like limits and high fees.
To take advantage of these cards, learn what cash back is, its advantages, disadvantages, and how to use it right.
What is cash back and how does it work?
Cash back refers to credit and debit card benefits that give you a percentage of your money back for each purchase. Unlike points or miles, which vary in value, cash back offers a simple percentage of your spending as a rebate. This rebate can come in various forms, like a statement credit, direct deposit into your bank account, or a check.
Every cash back program has different perks. Many only offer benefits for purchases over a specified dollar amount, and others work best for buying certain items, like groceries. Some even give you discounts at partner stores.
Why do credit cards give cash back?
Credit card companies make money through interest. They charge fees to the businesses that accept their cards. Every time you make a purchase, the business pays the transaction fee, and the credit card company shares part of that fee with you as cash back. This incentivizes you to not only use your card but use it in certain places that earn the company money.
It's a win-win. You get rewards for your spending, and the card issuer increases its transactions and the income that comes with them. The catch is that this system encourages you to spend more, which can put a damper on your savings goals or cause you to buy things you don’t need.
Cash back reward amounts
Reward amounts range from 1% to 6% on select categories. Some offers give you even higher percentages for a limited time during sales and promotions. But it all depends on the card, the issuer, and your spending habits.
Eligibility for cash back and other benefits usually depends on specific transaction thresholds, meaning you need to spend above a certain amount on every purchase. The amount is usually $25, but you’ll have to check with issuers to confirm.
There are also tiered-rate cards, which provide a higher percentage of cash back — typically between 2% and 3% — on specific purchases like gas or drugstore items. For these programs, all other purchases usually earn a base rate of 1% cash back.
Starting to earn cash back is as simple as applying for a credit card. Your account just needs to be open and in good standing — though not all transactions qualify for cash back rewards. Exclusions often include:
Cash advances
Card balance transfers
Cash-like transactions (purchases of foreign currency, money orders, or cryptocurrency)
Lottery tickets and other gambling-related purchases
Pros and cons of cash back
Cash back rewards are appealing, but they aren’t free money. Approach them with the same attention and weight as any other credit card. If you’re thinking of applying, look at the pros and cons first to make the right decision for your situation.
Benefits of cash back programs
Earn on everyday purchases. If you fill up your car, buy groceries, or dine out often, cash back cards can turn these regular expenses into opportunities to earn rewards.
Cash back bonus offers. Many cards come with big bonuses when you sign on. You just have to meet the initial requirements and get hundreds of dollars back.
Ease of use. Some cards offer points or miles, while others give you money, which is easier to calculate and more user-friendly.
Downsides of cash back programs
Potential for delay and limits. Sometimes, the issuer delays or caps your rewards at a certain amount, limiting your ability to get cash quickly.
Higher costs for some. Cash back cards can carry higher annual percentage rates (APR), meaning you have to pay high fees if you carry a balance.
Annual fees. Some cash back cards charge high annual fees, which can eat into your total rewards.
How to redeem your credit card cash back
Understanding the different ways to use your rewards can help you make the most of them. Here are some of the most common ways to redeem:
Statement credit. One of the simplest ways to use your cash back is by applying it as a statement credit. This directly reduces your credit card bill, saving you money.
Direct deposit. Many cards let you transfer cash back directly into a bank account. This gives you the flexibility to use the rewards however you see fit, whether it's for saving, investing, or spending on something special.
Gift cards. Redeeming cash back for gift cards can get you even more money. Credit card companies often partner with retailers, giving you more bang for your buck compared to other redemption options. For example, you might only pay $45 for a $50 gift card.
Merchandise. Some credit card programs let you make purchases directly through their rewards portals. While this is a convenient option, it's worth comparing the value you're getting with what you'd receive from other redemption methods.
Online shopping. Another popular option is using your cash back for shopping online at partner retailers. Look for exclusive deals or discounts that boost your cash’s value.
How to maximize your perks: 3 tips
It’s tempting to spend lots of money to get big returns, but it’s easy to go overboard. Instead, adopt strategies that actually match your spending patterns and financial goals.
Here are some key tips to use your credit card responsibly and maximize the perks:
1. Compare cards first
Don’t go for cards with generous welcome bonuses and reward structures right away. Shop around to find the best deals first. Whether it's a flat rate on all purchases or higher cash back in specific categories like dining, travel, or groceries, the right card can make a big difference.
2. Focus on your needs
Prioritize cards that reward you the most for your common expenses. If you spend a lot on groceries and gas, look for cards that offer extra cash back in those categories. If you love to travel, find options that work with airlines and hotels. Every dollar you spend works harder for you, maximizing the benefits you receive from your routine purchases.
3. Mind the fees
Always consider the costs. Annual fees, foreign transaction fees, and other charges can quickly eat into your rewards. Weigh the benefits of the cash back against these fees to make sure you're actually coming out ahead. In some cases, a card with a lower cash back rate but no annual fee might offer better overall value.
FAQs
Still not sure if a cash back program is right for you? Here are some answers to frequently asked questions:
Is cash back free money?
Not exactly. While it feels like you’re making money, it's a rebate for spending you're already doing, not additional income.
What credit score do you need to apply?
It varies by card, but most cash back cards require good to excellent credit scores for approval.
What are the best cash back credit cards?
The best card depends on your spending habits. Cards like Chase Freedom Flex, Citi Custom Cash, and American Express Blue Cash Preferred offer various reward structures to fit different needs.
Can you get cash back with a credit card?
You can’t get cash back with just any credit card. It has to be a participating card with a clear program in place.
Can I use cash back to pay off my credit card balance?
Yes, you can often use your cash back as a statement credit to reduce your credit card balance. This is one of the most common ways to redeem cash back rewards.
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