What Is a Cash-Back Credit Card?

 A woman in bed shops online with her phone and credit card.
•••

Su Arslanoglu / Getty Images

DEFINITION

A cash-back credit card allows cardholders to earn rewards on eligible purchases. Rewards you've earned are redeemable for cash in the form of a statement credit, direct deposit, mailed check, or gift card.

Definition and Example of a Cash-Back Credit Card

A cash-back credit card allows you to earn a percentage of your purchase as cash rewards. As long as your account is open and in good standing, your rewards accumulate with each purchase until you decide to redeem them.

  • Alternate name: Cash rewards card

For example, a cash-back credit card offering 1% cash-back rewards on all purchases would add $10 to your rewards balance when you make a $1,000 purchase.

How Do Cash-Back Credit Cards Work?

When using your cash-back credit card for an eligible purchase, the credit card issuer credits your rewards balance with a percentage of the purchase amount. Some credit cards offer the same flat-rate cash rewards for all purchases, while others provide a higher percentage for purchases in certain categories, whether you choose them or as assigned by the issuer. 

After your rewards are credited to your balance—it can take up to two billing cycles—you can redeem your rewards for cash back.

For example, a credit card may offer 2% rewards on gas purchases and 1% rewards on everything else. Spending $500 on gas and $1,000 on other shopping within a month could earn $20 in rewards.

Assigning Rewards

Many cash-back credit cards offer higher rewards for purchases in specific categories. With these cards, purchases qualify based on where you've shopped, not necessarily what you've purchased. For example, you may not receive a higher percentage designated for gas purchased at a warehouse club versus gas purchased at a standalone gas station.

Credit card issuers use the business's merchant category code to determine which purchases qualify for bonus rewards. Purchases may not be eligible if the merchant's category code doesn't qualify or the payment technology doesn't relay the code accurately.

Welcome Bonus

Many cards offer a welcome bonus to new cardholders. To get the bonus, the cardholders must meet a minimum spending requirement in the months after opening the credit card. For example, a $200 bonus if you spend $500 within the first 90 days after opening your account.

Some credit card issuers restrict the welcome bonus. For example, you can only earn it if you never had the card before or haven’t recently received a bonus for the card.

Redemption Options

Once you're ready to redeem your rewards, you can choose among your credit card issuer's options. Common redemption options include:

  • Statement credit
  • Deposit to your linked bank account
  • Check
  • Gift cards
  • Contribution to a 529 educational plan or other investment account

You can forfeit or lose your cash-back rewards if you default on your credit card payments or close your account before redeeming your rewards.

Types of Cash-Back Credit Cards

Cash-back credit cards can be categorized based on the rewards program structure.

Flat-Rate Cash-Back Cards

Flat-rate cash-back credit cards offer the same reward rate on all purchases. For example, earning 1.5% cash back for every $1 spent on all purchases. The rewards rate is generally low but available for more purchases. Since every spend earns rewards, you don't have to think about which credit card you'll use.

Tiered Bonus Cash-Back Cards

Tiered cash-back credit cards offer higher rewards for specific categories and flat-rate on all other purchases. You'll commonly find higher rewards on travel, dining, and gas purchases. A tiered credit card may offer 5% on travel, 2% on dining, and 1% on everything else.

Rotating Bonus Cash-Back Cards

Some cash-back credit cards offer one more more higher-tier rewards categories that rotate, usually every quarter or three months. Categories might include gas or groceries and certain retailers such as Amazon or Target. The card issuer selects the bonus categories, and you may have to activate the bonus to qualify for it.

Custom Bonus Cash-Back Cards

Some cards allow you to select your own bonus categories, on a quarterly or monthly basis. You might need to set your bonus purchase categories to be eligible for the higher rewards rate. 

Merchant Co-Branded Cash-Back Cards

Merchant co-branded cash-back cards function like hybrid-tiered cards. Retailers offering cash-back cards include Amazon, Apple, and Costco. These cards award the highest cash-back rate to purchases made with the retailer and a lower rate for other purchases. Read the fine print for any surprises, such as receiving your cash back only once annually. 

Typically, tiered and bonus-category cards set a limit on the amount you can earn each quarter or year. After you reach the limit, purchases in those categories earn the base rate.

Cash-Back Credit Card Fees

Cash-back credit cards may come with a few fees, some of which can be avoided.

Annual Fee

An annual fee is a yearly fee charged on cash-back credit cards. Annual fees aren’t common in the cash-back credit card world.

Transaction Fees

Most cash-back credit cards have transaction fees, taken as either a percentage amount or a flat rate:  

  • Foreign transaction fee: From using your credit card while traveling internationally or making purchases from foreign countries.
  • Balance transfer fee: moving the balance of one card to another.
  • Cash advances: taking out cash using your cash-back card.

Penalties 

Most cash-back credit cards also have penalties that you can avoid by carefully watching payment deadlines and terms: 

  • Late fee: Charged when you fail to make your payment by the cutoff time on the due date. 
  • Returned payment: Charged when a card payment is returned. 
  • Penalty APR: A higher interest rate charged on future purchases when you miss a minimum payment date.

How To Get a Cash-Back Credit Card 

Consider where you spend money to narrow down your credit card options, and how much you spend. Shop around with major credit card issuers to compare currently available offers and carefully review the categories offered. Some people spend a lot on groceries, while others spend more on dining out. In addition to the cash-back rewards program, pay attention to the welcome bonus, promotional APR, fees, and any credit card perks.

Look for a cash-back credit card that fits your credit profile. If you're working on your credit, consider a secured cash-back credit card to get your foot in the door.

Key Takeaways

  • Cash-back credit cards offer a percentage of eligible purchases as cash rewards.
  • Rewards programs may offer flat-rate, tiered, rotating, or a choice of bonus category rewards.
  • Depending on the card issuer, you can redeem cash-back all at once or in increments for a statement credit, bank deposit, check, or gift card.
  • Some cash-back credit cards offer a welcome bonus for new cardholders who meet minimum spending requirements.

Want to read more content like this? Sign up for The Balance’s newsletter for daily insights, analysis, and financial tips, all delivered straight to your inbox every morning!

Article Sources