Cash back credit cards: What are they and how do they work?
Credit card companies encourage loyalty by rewarding clients when they use the cards to pay for goods and services. Some give cash back for your purchases.
Cash back credit cards are a type of card that offers holders a percentage of their purchases back in the form of cash rewards. These rewards are typically a percentage of the total amount spent on the credit card, and they can be redeemed as a statement credit, a check, a direct deposit into a bank account. Sometimes, they can be claimed as a gift card or merchandise.
Here’s how cash back credit cards generally work.
Earning cash back
When you make purchases using a cash back credit card, you earn a certain percentage of cash from what you bought, that often range from 1% to 2%. For example, if a card offers 2% cash back and you spend $100 on eligible purchases, you would earn $2 in cash back rewards.
Reward categories
Many cash back cards offer different categories that earn higher cash back rates. These might include groceries, gas, dining, travel, and more. Some cards offer a flat cash back rate on all purchases, while others have tiered rewards based on spending levels or rotating categories that change periodically.
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Redemption options
Accumulated cash back rewards can typically be redeemed in several ways:
- Statement credit: The cash back is applied as a credit to your account, reducing your outstanding balance.
- Check or direct deposit: The rewards can be sent to you as a physical check or a direct deposit into your bank account.
- Gift cards: Some cards allow you to redeem your rewards for gift cards to various retailers.
- Merchandise: Certain credit card issuers offer online marketplaces where you can use your cash back to purchase merchandise.
Minimum redemption threshold
Some cash back cards have a minimum redemption threshold, which means you need to accumulate a certain amount before you can redeem it.
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Annual fees and interest rates
Cash back credit cards may come with annual fees, which can have an impact on the overall value of the rewards. It’s important to compare the potential earnings to any associated fees. Also, like all credit cards, these may have interest rates that apply if you carry a balance from month to month. Cash back credit cards are best for those who pay off their balance monthly.
Terms and conditions
Each cash back credit card has its own terms and conditions, including any restrictions on eligible purchases, limits on earnings, and expiration policies for rewards.
When choosing a credit card, consider your spending habits and preferences. Some cards might be more suitable if you frequently spend in specific categories, while others offer a consistent cash back rate across all purchases.