Everything You Need to Know About Cash Back Credit Cards

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6 minutes read

Category: Credit Cards
Posted on: 03/25/2021
a man sitting on his couch making a payment on his phone with a credit card

Cash back credit cards are one of the most popular credit card types on the market. Many customers love having the option of using their credit cards for purchases with the added benefit of withdrawing cash at the register. The appeal of cash back credit cards is obvious: These credit cards can function as both a means to make purchases and get cash conveniently almost anywhere. 

Many cash back credit cards feature additional benefits like gift card redemptions, bonus categories, flat percentage cash back, tiered rewards, or exclusive company partnerships. Each cash back card has its own unique draws for different customers and their preferences. Flat percentage cards are good for those who want a cash back card without extra hassle. Meanwhile, tiered rewards require more work from customers but can pay off with cash back in certain purchasing categories.

If you are trying to choose the right card for you, or if you are still figuring out the concept of cash back credit cards, read on to find all the information you need to get started.

How Cash Back Credit Cards Work

Cash back is basically a rebate created out of a percentage of your purchases. Merchants pay what is called an interchange fee every time they use your card. This allows card issuers to pay cash back to customers. Card issuers often fund rewards and rebates with sponsored merchants this way, too. Other cards use flat-rate cash back, meaning each purchase gives an equal cash back percentage. Tiered rewards cards and category bonus cards give varying percentages for cash back depending on purchase categories. Merchants receive four-digit category codes that show what type of business they are so that points can be applied appropriately. 

Customers can redeem rewards as a credit on their monthly statement or via deposit to their bank account. Card issuers also often offer gift cards, merchandise, and even charitable donations. Different card providers have their own terms and conditions, so make sure you check these before signing on. 

Advantages of Cash Back Cards

Cash back cards have a much better return on investment (ROI) than most bank accounts. Bank interest rates are currently quite low (often yielding as little as 0.06 percent annually). In contrast, many cash back credit cards offer 2 percent or more on every purchase. Cash back is also tax-free, unlike your savings account. This is because the IRS sees cash back payments as non-taxable rebates on purchases rather than income.

Cash back also stacks up, meaning it earns even more cash back when you spend it. The amount is small but can really add up over time. Some card issuers also offer bonuses for new customers like a few hundred dollars cash back just for signing up.

There are a variety of cash back credit cards, and they all work differently. Below, we will look at some of the most common types and how to use them. 

Cash Back Cards

Cash back credit cards are exactly what they sound like: Every time you make a qualifying purchase using your card, you receive cash back. Regular cash back cards offer a flat percentage for purchases, meaning you earn the same reward for purchases in any spending category. Unlike with some variations on the concept, cardholders do not have to track or activate special bonus categories. 

While cardholders are offered the same flat rate, card issuers still sometimes run special offers for specific categories, products, memberships, and services. Common variations on this theme are airline miles, gift cards, and discounts.

Category Bonus Cash Back Cards

Category bonus cards offer a greater percentage of cash back on specific spending categories that periodically change. Cards like Discover More, Citi Dividend, and Chase Freedom change their categories each quarter. Earning this higher percentage of cash back requires a bit of effort but is a sizeable reward. Some cards require cardholders to register for categories when they change by announcing them ahead of time. Others cap how much cash back will be rebated for categories. A small number of card issuers allow cardholders to pick their favorite categories based on their spending habits. Purchases outside special categories are usually only worth 1 percent cash back. These qualities can significantly alter how useful different cardholders find different cards. 

Tiered Rewards Cards

Tiered reward cards are similar to category bonus cards in that they use specific reward categories to award more cash back. However, tiered rewards cards require cardholders to think carefully about which cards to use for different purchases. Different card issuers offer their own rates for different categories. Some issuers offer up to 6 percent for their top tier categories, staggering other categories with 3 percent or 1 percent. This incentivizes cardholders to use these cards for purchases in top categories to earn the biggest rewards. It also encourages cardholders to have multiple cards, even cash back cards, to maximize rewards on their spending.

Which Cash Back Card Is the Best?

Deciding on the right cash back card is an extremely individual choice. Cash back cards are not the best fit for everyone, either. When you apply for cash back cards, there are a few factors to keep in mind:

  • Your credit score
  • Your preferences
  • Your spending habits
  • Whether your current bank or card issuer offers what you want

In most cases, cash back cards require a solid credit score, often 700 or higher. If your score is still in need of some repair work, you may still be approved for certain cards. This can help you further build up your credit to qualify for better offers in the future. Building your credit is also an important part of your overall financial well-being. 

Cash back cards can have offers involving travel or other categories, but these are generally better suited to specialized cards of their own. If you want airline miles or other types of travel perks, you may want to look elsewhere. You should also be careful about getting a cash back credit card if you have trouble controlling your spending. While rewards can be great, none are worth creating financial problems for.

Make sure you consider your spending habits carefully. You want to match a cash back card to a category you are likely to spend money on. Take into account sign-up bonuses, cash back percentages, annual fees, discounts, and types of offers that interest you. In fact, your preferences for categories and terms should be your motivator through the application process. After all, you are under no obligation to accept terms that do not suit you. Take your time deciding which card best meets your needs. 

Finance Guru

Finance Guru