How Do Cash Back Credit Cards Work?

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Updated: 1st Sep 2021
Written by Justin Estes
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September 1, 2021
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Cash back credit cards offer a rare opportunity for you to earn money on money you’ve already spent.

Does that sound confusing? Let’s clarify with an example, if you spend $100 at the grocery store, then you have $100 worth of groceries and $100 less in your account.

If you used a cash back rewards card, you could get between 1%-5% back on your purchase without doing anything different other than using your cash back card instead of your debit card.

Today we will discuss how cash back credit cards work, what they offer, and ultimately help you decide on how to choose one that aligns with your budget and lifestyle.

What Is a Cash Back Credit Card?

A cash back credit card is offered by a bank and gives cardholders the ability to earn a percentage of their spending back as cash back rewards.

Cash back rewards have various redemption options, but they all can lower your out-of-pocket expenses without having a major impact on your spending habits.

How Does Cash Back Work?

All cash back cards have a stated earning rate for different spending categories and stores.

Consumers have a wide range of cash back rewards cards to choose from, and the best way to find options that fit your lifestyle is to open your most recent bank and credit card statements to identify your top spending categories.

Some people spend most of their budget on groceries because they like to cook or have a large family, while others may spend a lot on gasoline because they drive to work every day.

Regardless of what you spend most of your money on, there is most likely a cash back rewards card available to help you get paid for your current lifestyle.

For example, spend $200 per month on gas and get a cash back rewards card that generates 3% back on fuel purchases. You could immediately get $6 back per month with an annual savings of $72.

If you also have a card that earns 5% back on groceries and spend $400 per month on that category, you could be getting $20 back monthly with an annual cash back reward of $240.

Adding two cash back categories into your financial strategy can easily save you hundreds of dollars annually by using the right cash back rewards credit card.

How to Earn Cash Back Rewards with Your Credit Card

Now that we have a general understanding of how cash back rewards cards work and how they can benefit your personal budget, let’s discuss the different rewards earning tiers you can find with a cash back credit card:

Flat Rate Cards

Flat-rate rewards credit cards are the simplest and most straightforward cash back cards on the market. They earn the same rewards on all purchases, no matter what the spending category is.

For example, if you have a cash back rewards credit card that earns 2% back on all purchases, you will earn the same amount of cash back at the grocery store, auto repair store, or barber salon.

Flat-rate cash back cards are an excellent option for consumers who want a no-frills spending experience and do not want to manage rotating spending categories or bonus rewards. They are also an excellent option for someone who does not have a set spending pattern.

Tiered Rewards Cards

Tiered rewards offer the benefits of flat-rate cash back rewards with the addition of a bonus spending category where the cardholder will receive a bonus cash back rate.

For example, you may have a card that earns 1.5% on all purchases and then 3% back on a category of your choosing. Options for tiered bonus categories usually include fuel, groceries, or dining.

These cards can be a powerful hybrid option for consumers who spend in many different categories but still want access to a higher earning category provided by the tiered bonus.

Bonus Categories

Cash back cards with bonus categories usually have a flat earning rate throughout most of the year and then provide a highly incentivized category where cardholders can earn a large cash back bonus, sometimes up to 5%.

Many cash back credit cards offer bonus categories for a limited bonus earning ability for the first year as a cardholder.

For instance, you may apply for a card that offers a 2% back flat rate, but for the first year adds an additional 3% to groceries bringing your grocery earning potential to 5%.

Since many cash back rewards cards do not charge an annual fee and do not have large introductory spending bonuses, these bonus spending categories are viewed as a happy medium.

Rotating Rewards Cards

Rotating rewards cash back credit cards offer some of the highest-earning potentials, but they require extra effort to ensure you get the best deal on your purchases.

While other earning structures may have one extra earning category, cards with rotating categories often have four or more high-earning categories that rotate throughout the year following a general spending calendar.

One example may be a card that earns flat 3% back on groceries, 2% on dining, 1% on all other purchases, followed by rotating 4% earning categories.

Popular rotating categories include groceries and pharmacies, fuel, online shopping, and home improvement.

If you are willing to keep up with the different spending categories, then a cash back card with rotating categories may be an excellent way to earn lots of cash back and turbocharge your budget.

How Do You Redeem Cash Back on Your Credit Card?

Cash back credit cards offer plenty of options for redeeming your accumulated cash back balance, and unlike travel rewards points that can vary in value, you will generally receive the same valuation across the board with cash back points.

  • Redeem for Gift Cards: Redeeming your cash back balance for gift cards can be a great way to save up extra cash for going out to a restaurant, shop for new clothes, or give away as a present. Most cash back card providers have a long list of associated vendors where you can purchases physical or digital gift cards with your cash back balance. If you choose a digital gift card, you will receive an email with the card number more quickly than if you ordered a physical card.
  • Statement Credit: Statement credits are a fast and easy way to take advantage of your accumulated cash back balance. When you receive your monthly statement detailing your new rewards balance, you can either wait and save your cash back balance or instantly use it as a statement credit that will reduce your bill by the balance you select.
  • Paper Check: Some card providers offer the option to redeem your cash back balance as a paper check if you prefer to have a physical copy. However, this option can take the longest and may not be suitable for someone who wants their cash back proceeds quickly.
  • Direct Deposit: Direct deposit is similar to applying your cash back balance as a statement credit, but instead of going directly to your credit card balance, you can send the funds directly to your checking account.

Who Are Cash Back Credit Cards Best For?

Cash back cards are an amazing financial tool for any consumer who has regular spending habits and wants to save money on their biggest expenses.

Since most of the top cash back cards do not charge an annual fee, adding one to your wallet can be a no-brainer solution to getting to the next level with your personal finances.

Do Cash Back Cards Actually Give You Money?

Yes – when you read that your card earns 2% cash back on all purchases, you truly earn $0.02 per dollar spent.

While that may seem like a small number, if the average American spends $2,000 per month, then that adds up to over $400 in cash back annually.

What Are the Benefits of Cash Back Credit Cards?

Cash back credit cards have many different benefits depending on the provider, but benefits can include:

  • Introductory sign-up bonuses.
  • Discounts at affiliate vendors.
  • Referral bonuses for getting friends and family members to get the card.

Sign-up spending bonuses are a great incentive provided by banks to get new card members to apply for a new credit card.

These sign-up bonuses often are along the lines of “spend $600 get $200 back in the first three months,” or a similar format.

These perks and benefits help the cardholders get extra value out of their credit cards, and they can be a great way to save more money.

What Are the Downsides to Cash Back Credit Cards?

Cash back credit cards are excellent options for many consumers, but one of the biggest potential drawbacks is redemption limitation if you want a more flexible reward structure.

Travel reward cards offer a much more diverse range of redemption options, including direct travel booking, statement credits, and more.

>> More: Cash Back vs. Travel Rewards

Is It Hard to Earn Cash Back Rewards?

No – earning cash back is easy if you choose a cash back credit card that matches your current spending habits.

Before opening a new cash-back credit card account, ensure that the rewards structure aligns with your budget and spending patterns.

How to Choose a Cash Back Credit Card

Once you identify the type of cash-back rewards you want, take some time to research comparable cards. Some options may work well in tandem with another travel credit card, while others may be great as a standalone card.

#1. Analyze the Rewards Structure

Cash back rewards can have rotating reward categories, flare rate rewards, or a tiered hybrid system. Make sure you understand the type of rewards offered by your card so you can maximize the potential value when you apply for it.

#2. Know the Qualifying Credit Score

Many cash back credit cards require a minimum “good” credit score to qualify for. Aim to have a score around 680 or higher when you apply to have a higher chance of approval.

#3. Understand the Associated Fees

Annual fees, late payments, and foreign transaction fees can quickly add up if you aren’t aware of your card charges. Be sure to read the fine print and understand exactly what fees and penalties are associated with the card before signing up for it.

#4. Shop Around and Compare Cash Back Cards

Since there are so many competing cards on the market, take extra time to shop around and make sure you are getting the exact card that is right for you and your finances. If flexible redemption is important to you, make that a priority.

Bottom Line: How Do Cash Back Cards Work?

Hopefully, you can see how useful cash back rewards cards can be if you use them effectively.

Once you identify your top spending categories, do some extra leg work to match the benefits you want with the optimal card.

Justin Estes
Justin Estes
Justin is an experienced personal finance writer, blogger, and author. His background in accounting and finance led to a passion for helping people make the most of their money and matching them with financial products that enhance their lifestyle. When he's not working, he enjoys hiking, playing guitar, and drinking coffee.